The two most important concepts in technical analysis are support and resistance, both of which are essential trading tools for cryptocurrencies. They represent the supply, demand, and general market psychology of the asset. In our article from today, we’ll go over support and resistance levels and how to trade with them.
What are levels of support and resistance
Lines that are horizontal or angled are used to represent support and resistance. Support is a price point where the price of cryptocurrencies frequently recovers after a decline. As buyers find the price attractive enough to buy and sellers are less inclined to sell, demand typically increases at this level, preventing price declines further. If the price of bitcoin keeps falling after the support level fails to hold, it means that the bearish mood has increased.
The opposition of support is the resistance level. When the price reaches a resistance level, it signifies that purchasers are less likely to purchase coins at this price point, and those who already own them or purchased them earlier perceive the price to be sufficiently alluring to sell. You may say that the asset’s maximum price as determined by participants in the crypto market during this time period is the resistance level. The price finds a new resistance level higher and the previous resistance level may change into a support line when there is an increase in demand and a bullish market sentiment.
What else about Support and Resistance should you understand if you want to trade profitably
Major and minor support and resistance levels are sometimes sometimes separated. Even though there may be some bouncing around them, prices typically drop through little levels. If the bitcoin price behaves differently around the minor levels, we may be able to tell whether a strong trend will continue or whether a new price range is emerging. The places that led to trend reversals are marked by significant levels of support and resistance. Curiously, round figures like 5, 50, and 100 that serve as psychological benchmarks for market players are frequently used to determine where Support and Resistance levels should be set.
Although in technical analysis it is acceptable to draw the lines slightly above or below the price picks, an asset is typically traded above the support level and below the resistance. Particularly in the turbulent cryptomarket is this true. For this reason, drawing support and resistance zones rather than lines at times makes more sense. Prior lows are used to determine the support zone, while prior highs are used to determine the resistance zone. Zones work best for lengthy durations, whilst precise levels work better for short trading ranges.
When demand and supply are balanced, there is typically little volatility and the price of the crypto asset swings within a trading range. When a trading range is broken, it means that the bulls or bears have finally prevailed.
The following is the cryptocurrency trading technique based on support and resistance levels: purchase just above the support during uptrends and sell close to the resistance during downtrends. Remember that there is no guarantee that the levels of support and resistance will persist; go one step further and wait for the trends to be confirmed. Combine support and resistance points with additional trend-confirming indicators.
How should support and resistance lines be drawn on a chart
You only need a price chart and a tool to create lines to complete it. Just carry out these actions.
1. Determine support and resistance levels and look for the next significant price picks above and below the present price.
2. Check the broader chart to see how the price of cryptocurrency has behaved around certain levels in the past and determine whether these levels make sense. Remember that encouragement and opposition can feed off one another.
3. Re-do the prior processes to determine the following major levels. As a result, you’ll obtain a chart with a number of lines that could perhaps represent the next significant levels of support or resistance.