Among all the aspects of technical analysis, perhaps the most important and actionable concepts are support and resistance. Many other aspects of technical analysis, such as price patterns, are based on the key concepts of support and resistance.

Support represents a low level a coin price reaches over time, while resistance represents a high level a coin price reaches over time. Support materializes when a coin price drops to a level that prompts traders to buy. This reactionary buying causes a coin price to stop dropping and start rising. Conversely, resistance materializes when a coin price rises to a level that prompts traders to sell. This selling causes a coin price to stop rising and start dropping.

One way you can find support and resistance levels is to draw imaginary lines on a chart that connect the lows and highs of a coin price. These lines can be drawn horizontally or diagonally.

Importantly, support and resistance levels are estimates and not necessarily exact prices. Try focusing on price zones when identifying support and resistance.

Identifying support

There are generally two types of support: horizontal and diagonal. In this first example, you can see an instance of horizontal support that formed in a coin at $182, as seen in Figure 1. Notice how the coin stopped going down and started moving up on four different occasions after trading to $182. These four roughly equal lows, when connected by a line, form support. A trader identifying this support might try to buy the coin near support.

Horizontal support example

The second type of support is diagonal. Like horizontal support, diagonal support is formed by connecting lows. The difference with diagonal support is that the lows are sequentially higher because a coin is in an uptrend. You can see an example of diagonal support in Figure 2. Notice how the coin stopped going down, and continued trending up, on several occasions after its price dropped near the diagonal support line. A trader identifying this support might try to buy the coin near support.

Diagonal support example

Identifying resistance

Like support, there are typically two types of resistance: horizontal and diagonal. The chart in Figure 3 displays an example of horizontal resistance where the coin traded up to about $115 on several occasions before reversing. A trader identifying this resistance might sell the coin near resistance.

Horizontal resistance example

The second type of resistance is diagonal, which typically forms in the context of a downtrend. Diagonal resistance is formed by connecting sequentially lower highs. You can see an example of diagonal resistance in Figure 4 within the context of a downtrend. Notice how the coin stopped going up, and resumed the overall downward trend, on several occasions near the diagonal resistance line. A trader observing this resistance might avoid the coin or even sell.

Diagonal resistance example

Applying support and resistance

The most effective way to apply support and resistance is to monitor for breakdowns and breakouts. A breakdown is when a coin falls below support. A breakout is when a coin rises above resistance.

One way some traders apply support breakdowns is by selling a coin in anticipation of further downside and in an attempt to limit potential losses. One example of this is seen in Figure 5. Notice how the coin continued to drop after its breakdown below diagonal support.

Breakdown below support example

Some traders monitor coins near resistance and buy once the coin experiences a breakout above resistance. You can see an example of a breakout above resistance in Figure 6. A trader monitoring this coin may have bought the coin on the day of the breakout and potentially profited in the following days.

Breakout above resistance example

Selling coins that breakdown below support, or buying coins that breakout above resistance, are a few ways to apply support and resistance.