- The Summit Post
- Posts
- TSP #20: Psychology of S/R levels
Marco Johanning
Hello everyone!
Welcome to the 20th edition of my newsletter! Every Saturday I’ll be sending out a quick newsletter on how to master crypto.
Today, I focus on the psychology of S/R levels.
Thank you very much for subscribing! The Summit Post has over 240 readers now!
Disclaimer: The information provided in this newsletter is for educational and informational purposes only. It does not constitute financial advice, investment recommendations, or any form of endorsement.
Always conduct your own research and consider consulting with a qualified financial advisor before making any investment decisions.
The author and publisher of this newsletter is not liable for any actions taken based on the information presented.
S/R levels
Support and Resistance (S/R) levels are essential tools for every trading style. They are like important price markers in trading. Imagine them as floors and ceilings in a building.
Support: It's like a floor that holds the price up. When the price drops to a support level, it often bounces back up.
Resistance: Think of it as a ceiling that stops the price from going higher. When the price rises to a resistance level, it often falls back down.
Why?
How a Support Level forms
It is often said, S/R levels are just lines on the chart that work only because almost everyone draws the same lines. However, there is much more to it in reality.
Let's categorize traders into three groups: longs, shorts, and those on the sidelines.
Imagine a market rising from a support area.
Longs are happy but wish they bought more, eagerly awaiting a dip to add to their positions. Shorts realize they're on the wrong side, hoping for a dip to exit at break-even.
On the sidelines are those without a position and those regretting selling their longs in the support area, hoping to reinstate them. Undecided traders now plan to join on the next buying opportunity.
So, even though everyone has different motivations, they will all buy the next dip, and the price will rise. There’s the bounce.
A support becomes more important the more trading takes place there, measured by time, volume, and recent activity.
Support becomes resistance
Now, let's switch things around and imagine that instead of going up, prices start to go down.
In the earlier example, when prices were going up, everyone reacted by buying more when the price went down a bit, which created new support.
But if prices start to drop and go below the previous support area, the reaction is the opposite.
Those who bought in the support area realize they made a mistake. Traders can't afford to stay in losing positions for long. They have to add more money or close their losing trades.
What initially caused the support was a lot of people wanting to buy at a certain price. Now, all those people who wanted to buy are now trying to sell. So, what was support becomes resistance.
The more important the previous support area was — how recent it was and how much trading happened there — the stronger it becomes as an area where prices are likely to stop going up.
Twitter Reads
Since beehiiv currently has problems with the integration of tweets, the Twitter Reads today as screenshots.
Just click them to get to the original Twitter post!
Great video - watch!
With my best regards and wishes, I hope you have a wonderful weekend.
Marco Johanning