One of the most important things any investor needs to understand is the most basic thing, and that is support and resistance. The reason being is because this allows investors to know when it is a good or bad time to be buying or selling any particular asset. In this video, I want to show you exactly how to find these levels so you can make better decisions when it comes to trading.
Without further ado, let’s jump right in!
Welcome! If you’re new to the channel, my name is Matt Jimenez. I’m an entrepreneur who has worked with some of the greatest minds in finance over the last several years, and I’m here to share everything they taught me. I’ve been in the investing space for many years now, and I initially got started in the foreign exchange markets. One of the very first things that I learned was technical analysis.
Now, if you don’t know what technical analysis is, it’s basically using price patterns to help you predict where an asset may start trading—whether it’s to the upside or downside. As you evolve as a trader and investor, you typically couple technical analysis with fundamental analysis, which studies the news that comes out around a particular asset.
In this instance, it would be around central banking and economic policies that influence the foreign exchange markets. When it comes to Bitcoin, economic standings will also impact it. But in short, fundamentals are basically the news-related factors around that particular asset that may affect it.
Today’s video, however, is mainly going to be about technical analysis and one of the most simple yet powerful tools anyone can use for pretty much any asset. Now, to put support and resistance in a very simple box, it is where you’re looking to buy and/or sell. If it’s hard for you to remember that, just think of support as the buying zone, and resistance as the selling zone.
People also use these levels as areas to place their take profits and stop losses to keep it safe from volatile price action. Now, let’s draw some examples so you can get a better understanding of how support and resistance work.
Support is used to help people find good areas to buy or to give them some mental clarity about whether the asset will hold its price there because they don’t want it to drop any lower. Support is typically found below price action. I like to think of it as a trampoline for price.
Now, this line that I drew is a support line. Typically, price action will come down to this level and bounce along it, as many buyers and other retail traders are looking to put buy orders in this area.
One thing I like to mention about support and resistance is that it’s typically never just a line. While you may have identified different levels of support, none of them are actual exact levels. I like to look at them as zones. What I mean by a zone is that while you see this line, you have to take into consideration a buffer zone both above and below it. The reason being is because price is never going to trade exactly to the line that you see.
When it comes to technical analysis, you have to understand that technicals typically happen because everybody is looking at the same support level, but no one sees the exact same number that it’s at. This is why I call it a zone. And there are a lot of other fancy terminologies that people use. Typically, people use the word “demand zone” for a support level, but they’re just trying to be fancy and confuse you. It’s support.
The other fancy word people use for resistance is a “supply zone.” Resistance is supply, and support is demand. I’ll get into that in a second, but for now, let’s just stick to support.
The easiest way to identify support and resistance is when you see price trading and having a reaction. Typically, the reaction will leave a mark. Now, I’m just going to draw randomly here and all around.
What I like to do is look for, like I said, those hard bounces. Those hard bounces indicate that there is some type of interest at that level. As you can see right here, that’s a support level. If I drag it out a bit further, it became resistance.
Something I’d like to mention here is once support is broken, it often becomes resistance, and that is the same for resistance levels.
Now, let me show you some resistance levels that I’m seeing on this graph that I drew. You see this area, this area, this area, and this area? If I were to draw a resistance line—remember, it’s a zone, so think of it as a buffer—excuse my level of drawing; it’s quite difficult. But it’s the same thing as support. It is just an area that others are looking at to find a position.
Resistance is typically a zone where people will find a sell position. So, as price trades up into this area, people are looking to find sell positions. The same thing happens with support—people are looking to find buy positions in that zone.
Now let me go ahead and erase all this. Another way that people like to look at support and resistance, and this is something I always do, is by drawing some random jagged lines.
As you can see, up top is a clear resistance level, and down below is a clear support level. In between, you have some resistance and support. As you can see: support, resistance, resistance, resistance, resistance.
Now, people use these support and resistance levels as potential areas to hide their stop losses or place their take profits.
Let me draw an example. Let’s say this is a support level here, and this is resistance here. We have price trading, and let’s say I went long in this area. I know that price can make it to this potential area where resistance is, so I would place my take profit close to the resistance. This way, I know the likelihood of this position hitting its take profit is in my favor.
Now, the way someone would use this exact method for their stop loss is by placing a stop loss below support. So, if this is support and we have a long position here, it would be very easy for price to trade down into this area and stop us out if we have our stop loss a little bit too high.
So, using these support levels and resistance levels, we can place our stop losses in safe zones. A stop loss typically requires you to put a buffer between the support level and where the stop loss is. This dotted line would be your stop loss. As you can see, from here to here is a good, safe margin where you won’t get stopped out.
Now, markets are extremely volatile, and sometimes—actually, more often than not—you might be right, but the problem is you don’t have enough wiggle room for your stop loss, and you end up getting stopped out. Then, the trade continues to go in your direction and hits your take profit, and that’s one of the worst feelings ever.
Now, let me show you some live examples of support and resistance on charts.
Okay, here we have USDJPY, and it’s funny because I drew these arrows a couple of weeks ago when price was down here to show that we’re going to have a pop-up into this area to form a right shoulder and then roll over.
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