Why You Need Support and Resistance Levels for Better Trading

Whether you’re a beginner or an experienced trader on eToro, knowing when to enter and exit a trade is crucial. The exit and entry points are pivotal in executing trades and can either make or break any chances of gaining profits. In addition to entry and exit points, traders should also be aware of significant price levels or historical price levels of a market. These levels, along with the entry and exit points, can be identified easily by understanding the concept of support and resistance levels.

Key Takeaways

→The stock-to-flow ratio measures the scarcity of an asset by dividing its existing stock by its annual production (flow).

→Originally used for pricing precious metals, the S2F model has been adapted for cryptocurrencies like Bitcoin.

→The model suggests that the price of scarce digital assets like Bitcoin should increase in the long term.

→Critics argue that the S2F model is overly simplistic and ignores other factors influencing asset prices.

→The S2F model is just one of many tools available for predicting asset prices, and should be used with caution.

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🤔 What are Support and Resistance Levels?

A support level is the base of an asset where the price is expected to stop falling, while a resistance level is the highest area of an asset where the price is expected to stop rising. In other words, support is the floor, and resistance is the ceiling – it is only within these levels that the price is expected to reach.

The support and resistance levels are horizontal lines connecting a common price point from a series of price movements. For the support level, it is located in the lower area of price action. It is established by drawing a line connecting common lower lows of price action.

In the example below from the asset – TSLA, the support level is created by drawing a horizontal line that connects the lower lows of price action. The red arrows show that the price did not break through or breach the horizontal line. The Support level is the level at which the price bounces back up – as represented by the red line in the image.

On the other hand, if the price keeps reaching a specific price level at the top, it becomes a resistance level. In this example, the price tried to break through the horizontal line but was not able to. As soon as the price touches or hits the resistance level, it pulled back down.

In this regard, breakouts happen when either the support or resistance level is breached. For this particular example, the support level has been breached or penetrated thus causing a breakout.

Support and resistance levels also serve as trend indicators that specify the trend of a market – whether it is bullish or bearish. This is done by drawing a line that connects the highs and lows of price action. If it creates an ascending line, the trend is bullish. On the other hand, if the line that has been created is descending, the trend is bearish.

The two images below provide examples of how the trend of a market is determined through resistance levels.

The first image from the asset – Zoom, shows a line that connects the highs of each price range. In every price range, the highs are decreasing thus creating lower highs in every range. Since the line drawn from connecting the lower highs is descending, the trend is considered bearish.

The second example below from the asset – BTC, shows a bullish trend by drawing a line that connects all the highs of a price range. The higher highs on every new price range immediately show that the market is on an uptrend.

Most of the time, support levels can also become resistance levels and vice-versa as the trend changes. This can be done by extending the line towards the current or future price range. In the example below, the red arrows indicate support levels from a downtrend market. As the support levels are extended to the right of the chart, these become levels of resistance. This event where the support level becomes the resistance level of the new price range usually happens at the end of a trend – such as an example which is the end of a downtrend.

🎢 Support and Resistance Levels as Trend Indicators

Support and resistance levels also serve as trend indicators that specify the trend of a market – whether it is bullish or bearish. This is done by drawing a line that connects the highs and lows of price action. If it creates an ascending line, the trend is bullish. On the other hand, if the line that has been created is descending, the trend is bearish.

🔑 Importance of Support and Resistance Levels

Support and resistance levels provide a good assessment of breakouts and serve as stop-loss and target prices. A stop-loss price is a price level where the trader closes their trade to avoid further losses from a bearish market. On the flip side, the target price is the price level where the trader sells their trade to lock in profits. Stop-loss price and target price can also be considered as safety measures when trading to avoid considerable losses and guarantee profits.

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Disclaimer And General Risk Warning:

• ► The information provided should not be seen as financial advice and is only intended for entertainment and informational purposes.
• ► Financial asset providers listed offer a variety of financial products and services, including Stocks, Crypto assets, and CFDs.
• ► CFDs are complex instruments with high risk due to leverage. In fact a 77% to 86% of retail investor accounts lose money when trading CFDs. Make sure you understand how CFDs work and evaluate whether you can afford the potential risk of losing your money.
• ► Past performance does not guarantee future results. A trading history of less than 5 complete years may not be sufficient for making investment decisions.
• ► Financial asset providers do not constitute investment advice. The value of your investments can fluctuate, putting your capital at risk.
• ► Cryptoasset investments are highly volatile and may be unregulated in some jurisdictions. Consumer protection may not be available, and taxes on profits could apply.
• ► USA financial asset providers are not affiliated with any specific entity and do not offer CFDs. The platforms take no responsibility for the accuracy or completeness of the content in this publication, which is based on publicly available, non-entity-specific information.

► Trade with caution and be warned!

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Author & Expert Trader - Financial Analyst:

My name is Bart Bregman and I am a full-time professional trader with nine years of experience. I specialize in shorter-term trading using technical analysis, and I have extensive experience with Stocks, CFDs, Options, and Crypto trading. I believe that there is no such thing as a bad trade. I'm currently traveling the world as a digital nomad trader. You can follow my journey on Instagram at https://www.instagram.com/bart_bregman/