Price structure
Support and resistance: what a level is, and what it is not
A level is the most useful drawing on a chart and the most over-claimed. It is a price where people previously changed their minds. It is not a force, a floor, or a promise.
Where a level comes from
Support is a price below the current price where buying previously arrived or selling previously stopped, so the market turned up. Resistance is the same thing above: a price where the market previously turned down. Both are built from the swing points of the first lesson, which means both inherit everything that is true of swing points.
In particular: a level is drawn after the fact, because it is made of pivots and a pivot is confirmed late. You cannot mark resistance at a price the market has never turned at. By the time there is something to draw, the turn that justifies drawing it has already happened and been paid for by whoever was holding.
Other prices get called levels too, and they are worth separating because they come from different places:
- Prior swing highs and lows - a specific price where trading demonstrably stopped going one way. The only kind with direct evidence behind it.
- Round numbers - 1.00, 10, 100, 50,000. Not evidence of anything that happened, but people place orders at round prices, so order flow really does cluster there. An honest level of a weaker kind.
- Range edges - the top and bottom of a sideways stretch, which is just the highest swing high and the lowest swing low of that stretch. The next lesson is about these.
- Indicator lines - a moving average is not a level. It is recomputed every bar and sits wherever the last N closes put it, as the moving averages lesson explains at length.
A level is a band, and you chose how wide
Nobody trades at a single price. "Resistance at 1.0000" in practice means a band around 1.0000, and the width of that band is a setting you picked - usually without noticing that you picked it. It decides how many touches your level has.
the level = 1.0000 a tolerance of 0.25% -> band 0.9975 to 1.0025 approach at 0.9960 outside the band approach at 1.0010 inside - a touch approach at 0.9930 outside the band touches = 1 a tolerance of 1.00% -> band 0.9900 to 1.0100 all three approaches inside - three touches touches = 3
Same data. Same level. One touch or three, depending on a number you never wrote down. And "a level that has been tested three times" sounds enormously more convincing than "a level that has been tested once", which is precisely why the tolerance has to be fixed before you start counting.
How often an ordinary chart touches an ordinary price
Before treating touches as evidence, it is worth knowing how many touches a price in the middle of a sideways market collects purely from price moving about. The arithmetic is blunt:
a coin ranging over = 6% top to bottom typical distance travelled per day = 3% over 30 days, total travel = 30 x 3% = 90% one round trip across the range = 6% up + 6% down = 12% round trips in 30 days = 90 / 12 = 7.5 each round trip crosses a mid-range band twice, so touches of that band = 7.5 x 2 = about 15
Fifteen touches of a price that has no special meaning at all. The number of touches is therefore not evidence that a level matters - it is partly a measure of how much the market moved and how wide your band was. A level with many touches in a quiet range has told you almost nothing.
What would be evidence is harder and less satisfying: a turn at that price that was sharper than the turns the same market makes at prices with no history. That is a comparison, it requires you to have defined the rule before looking, and the final lesson in this module is about why.
The honest version of what a level is
People talk about support as if the price were a shelf. There is no shelf. Here is the mechanism, and it is entirely human:
- At 1.0000 last month, enough people decided to sell that the advance stopped. Some of them are still there, with unfilled orders or with a plan to try again.
- People who bought just under 1.0000 and watched it fail remember the price. Some will take their money back at break-even if it returns.
- People who wanted it cheaper and missed it have a price in mind, and it is usually a price they can name - which is why round numbers behave like levels without having any history at all.
- Software looks at the same chart. Orders get placed at prior highs because prior highs are what the rule says, and that concentration is real whether or not the reasoning behind it is.
So a level is a memory of a decision, held by people and programs who may or may not still be there. That is a real thing and it is perishable. The participants who made 1.0000 matter have been liquidated, filled, bored or replaced, and nothing on the chart tells you which. The older the level, the more of it is gone.
What a level cannot do
- It cannot hold anything. Price goes through levels constantly. A level is a place where something happened before, and the market is under no obligation to repeat itself.
- It cannot tell you direction. A level is a price, not a bias. The same line is support from above and resistance from below, and "support became resistance" is a description of a chart, not a mechanism.
- It cannot be counted honestly after the fact. Scrolling back and noticing the levels that worked is not measurement, because you were also choosing which prices counted as levels while you looked. The MACD lesson makes the same point about divergence.
- It cannot replace a stop. A stop is a price and a rule decided before the trade existed. Moving it because a level "should" hold is how a planned loss becomes an unplanned one. See the risk disclaimer.
Used properly, a level does one job well: it tells you where the interesting prices are, so you can decide in advance what you will do if the market reaches one. Deciding in advance is the entire value. The line itself is just a note of where to decide.
The terms, defined
- Support
- A price below the market where it previously turned up. Evidence of past behaviour, not a floor.
- Resistance
- A price above the market where it previously turned down. The same thing with the sign reversed.
- Tolerance band
- The width you allow around a level before calling an approach a touch. A setting you choose; it decides your touch count.
- Touch / test
- An approach that comes inside the tolerance band. Not inherently meaningful - a moving market produces plenty of them.
- Round number
- A price humans name easily. It has no history behind it and order flow clusters there anyway.
- Stale level
- One drawn from a pivot old enough that the participants who created it are likely gone. It looks identical to a fresh one on the chart.
What this means in practice
- Build levels from swing points you marked with a fixed rule, not from wherever the line tool happens to look tidy.
- Write your tolerance down as a rule - a fraction of the typical bar range - and apply the same one to every coin.
- Count touches only after the tolerance is fixed. A touch count collected while you were adjusting the band is not a count of anything.
- Ask how old the level is and whether the people who made it could plausibly still be there.
- Prefer a small number of recent, clean pivots over a chart covered in lines. More lines means a line near every price, which means the chart can never surprise you.
- Use a level to decide in advance what you will do if price arrives. Never use one to justify moving a stop that was already set.
Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.