In Lesson 1 we went through candlesticks. Lesson 2 is where those candles start to mean something, because a hammer or an engulfing candle in the middle of nowhere is not the same as one sitting right on a level the market cares about. This post covers how I find support and resistance, how I draw it, and how I use divergences to decide if a level is likely to hold. The full live lesson is below.
Support is below price, resistance is above
Support is an area below the current price where buyers have stepped in before. Resistance is an area above the current price where sellers have stepped in before. Pull up a weekly chart and eyeball it. The places where price keeps bouncing or getting rejected are your levels.
Draw zones, not perfect lines
I draw support and resistance as zones instead of one thin line, because price rarely respects one exact number. A zone also keeps my bias in check. I draw my levels on the candle bodies, not the wicks. I care where candles closed.
When resistance flips into support
This is one of the most useful things you can learn. When price breaks above a resistance and closes there, that old resistance often becomes support. Think about it from the market’s side: people were selling at $300, and now people are buying at $300. Some of my favorite entries come from the retest of a level that just flipped. The same works in reverse. When support breaks and price closes below it, that level often turns into resistance on the way back up.
Two closes, or it is a fake out
I need two candle closes beyond a level before I treat it as broken. One close below support followed by a close right back above it is a fake out to me, and If the second candle also closes below, then I start thinking the level has failed and I plan for that.
The same idea applies to candle signals. A shooting star at resistance looks bearish, but if price closes back above the top of that candle, the rejection is invalidated. You are going to be wrong a lot in trading and that is fine. What matters is knowing where you are wrong.
How many touches is too many?
One or two touches on a level is what I like to see. A third or fourth touch is a warning sign, not a confirmation. Every time price comes back to the same resistance, there are fewer sellers left there. I have watched supports hold three times and break on the fourth. The more times price tests a level, the more likely it is to go through it.
Volume at the level
Volume tells you how much the market cares. High volume selling into a support that holds with a strong reaction is usually panic selling, and that can mark a bottom. A push above resistance on low volume tells me buyers do not really care, and those moves often fail. When I see sell volume getting smaller and smaller as price drops into a zone, it tells me sellers are running dry.
Divergences: what RSI and OBV add
A divergence is when price and an indicator disagree. I use OBV (On Balance Volume) the most, and RSI on higher time frames.
- Bullish divergence: price makes a lower low but the indicator makes a higher low. Price is dropping but the strength behind the drop is fading.
- Bearish divergence: price makes a higher high but the indicator makes a lower high. Price is climbing on weakening strength.
Two divergences in a row are stronger than one, and three are stronger than two. I like OBV because volume tends to lead price. A quick note on overbought and oversold: I do not use those terms. RSI can sit high for a long time while price keeps going up, and I have seen it drop to 2 on something before it bounced. A high RSI means the market is strong, not that it has to drop.
For divergences, use the 1-hour chart at a minimum and the 4-hour if you are new. Lower time frames are too choppy to trust until you have more experience.
Putting it together
Here is the setup I showed on stream. Price drops into a support zone I already had drawn. The first touch has no divergence, so I do not have much of a reason to buy. On the second touch, the candle leaves a long lower wick, sell volume is lower than it was on the way down, and RSI makes a higher low while price makes a lower low. Support holding, a lower wick, falling sell volume and a bullish divergence: that is enough of a reason for me to take a trade. My stop goes below the zone and my first target is the next resistance above. In that example the risk was about 1.5% and the distance to resistance was close to 5%.
Everything looks easier in hindsight. That is why I keep telling people to be patient. You will almost never miss a move by waiting for the market to show you its hand. Set an alert at your zone and come back when it gets there.
Learn the basics first
I used to coach a youth soccer team. The girls knew all kinds of fancy moves but could not make a clean pass, so we went all the way back to basics. They got worse at first, then everything else got easier. Trading is the same. Learn candles, levels and volume before you stack on anything else. Start with How to Read Candlestick Charts, and when you are ready, move on to Understanding Chart Patterns.
Keep learning
All of my free lessons, including the #TAtip chart breakdowns from X, are on the Free Content page. The full Trading for Beginners playlist and my other videos are on the Videos page.
If you want to see how I put this into practice, the Crypto Portfolio Tracker is my private Telegram group where I post my entries and exits, stop losses and market updates in text. It is there to learn from, not a promise of results.
Not financial advice. This post is for educational purposes only. Trading crypto is risky and you can lose some or all of your money. Do your own research and make your own decisions.