The importance of Technical Analysis in Trading | Horizontal Supports and Resistances

Trading is undoubtedly a profession that requires a lot of study and dedication if we want to succeed in being profitable in it. In my previous publications I have shared information about whether trading is profitable or not, my personal opinion about this, due to my experience in the investment field is that, if it is profitable, but it requires a lot of study and consistency so it all depends on the type of people we are and if of course we are passionate about the world of investments and financial markets.

Based on this, many have asked me how they could start in a world as wide as that of investments in financial assets and also where they would start, in that sense, I want to make a series of publications that educate the community about this, at least the simplest to understand so they can have notions. For this reason, this post will address a vital part of what it takes to be a good investor and that is to know the importance of Technical Analysis.

It is a tool with which we seek to follow the action and price behavior that has a certain asset in the financial markets, all in order to manage our positions, choose entry and exit points, in addition to putting the probabilities of investment in our favor to minimize risk.

In my opinion, technical analysis is a fundamental part of our trading, since it allows us to see the stock and the movement of the price with which we can determine at what point it would be more appropriate to buy or sell, therefore, this is one of the most important tools to use and learn.

The graphical part of trading is very broad, there are many ways to analyze and many strategies to use, but we should not abuse all that offers technical analysis, because instead of helping us make an investment decision, we can be much more confused and we will not be able to decide at what point to buy and / or sell, so we would no longer be placing the highest odds in our favor, which is all we seek.

A fundamental part of carrying out a fairly complete technical analysis, without doubt are the supports and the resistances, in this publication I wanted to touch on this subject, because part of the courses that I give in this branch, I focus quite a lot on these areas where the price takes a great role and where we can take a favorable decision for our operation.

Supports and resistances are market areas where in the first case, the strength of supply meets the strength of demand which slows down its action and which is recorded in the market memory as a congestion area. Then, resistance is a price zone where the demand is stopped by finding a sufficient supply force to make prices fall and which is also registered as a market antecedent.

The more times the price has been refracted by such support and resistance zones, the more valid will be its subsequent break. In the following image I will show the supports and horizontal resistances, which are the most common and where these would be easy to identify.

In the "BTC/USDT" chart at Binance, we see those areas where supply and demand debated who was winning and will be respected by the price action in the future.

Normally the most frequent questions I am asked is in which time frame or chart is the best layout of the supports and resistances. Regardless of the strategy used I recommend that you go from the General to the Particular, that is to say that you use a deductive method for the analysis, in a few words it is about determining which are the S and R in week, day and 4hs graph and adjust your operation within the possible rebounds in those zones, or outside, that is to say after its break.

Why do I say that it is essential to use supports and resistances? Well, empirically we can see with almost a single visual exercise that prices will tend to repeat their action on price zones determined in the past which are and will be neuralgic points within the price chart. This is only the third principle of Dow, which says that the market has memory, as a support to be overcome is transformed into subsequent resistance and vice versa, so these areas will always be of vital importance in any operation regardless of the asset.

The traces within the graph of these market values are established in the following way: check no less than two screens backwards, go through the compression and temporal extension once backwards. The first thing you will find is the congestion price zones or reversal points, visually we see them as "V" spikes, either up or down. From there, draw a line that links the most of those zones with a minimum of two.

From there you can go back to the current date, visualizing in that tour how many times the price has touched those zones or values and how it has reacted. If we can see that there are 3 to 4 touches with a price reversal, congestion or the so-called "Pullback" is in the presence of a valid support or resistance.

Here is a small example of how to do this: