In technical analysis support and resistance are two concepts that help traders for identify the price levels at which the market is likely to reverse or consolidate. In this blog we will cover what is support and resistance in cryptocurrency and how you can apply support and resistance in your trading strategy?
What is Support and Resistance in Cryptocurrency?
Support and resistance are two fundamental concepts in technical analysis. The method of analyzing price fluctuations based on historical patterns and trends is called as technical analysis or TA. Technical analyst utilize support and resistance levels to determine where the value of a cryptocurrency is likely to rebound or reverse.
Support refers to a price level where the demand for a cryptocurrency is robust enough to halt its further decline. It serves as a foundation for the price where buyers generally enter the market and push the price higher. Resistance is a price level where the supply of a cryptocurrency is potent enough to prevent it from rising further. It serves as a ceiling for the price where sellers generally enter the market and push the price downward.
Support and resistance levels are not fixed values but rather zones or ranges that can fluctuate based on the time frame and market volatility. They can also vary over time as market conditions evolve.
How Support and Resistance Works?
Support and resistance levels operate based on the psychological principle of supply and demand. When the price of a cryptocurrency reaches a support level on chart it indicates that there are more buyer than seller in the market generating upward pressure on the price.
When the price hits a resistance level it means that there are more sellers than buyers in the market generating downward pressure on the price.
Support and resistance levels also operate based on the principle of memory. When the price of a cryptocurrency reaches a support or resistance level that has been tested previously it tends to react in a similar way as it did in the past. This is because traders recall how the price behaved at those levels and act accordingly.
For example if the price of Bitcoin bounced off a support level at $30,000 multiple times in the past it indicates that this level has proven to be a robust area of demand. Similarly when the price approaches this level again, traders expect it to bounce again and will buy more Bitcoin. This creates a self-fulfilling prophecy that strengthens the support level.
Does Support and Resistance Really Work?
Support and resistance levels are not Foolproof indicators of future price movements based on historical data which does not guarantee that they will repeat in the future. Support and resistance are susceptible to change as new information and events influence market sentiment and dynamics.
Support and resistance levels are still valuable tools for traders who wish to get a sense of where the price of a cryptocurrency may encounter obstacles or opportunities. By combining them with other technical indicators and fundamental analysis traders can develop more informed and effective trading strategies.
How to Identify Support and Resistance Levels –
There are different methods for identifying support and resistance levels in the cryptocurrency market. Some of the most common way to find support and resistance are –
Horizontal lines – These are straight lines drawn across the highs and lows of previous price swings. They indicate where the price has encountered support or resistance in the past and where it may encounter them again in the future.
Trend lines – These are diagonal lines drawn along the direction of an uptrend or downtrend. They indicate where the price has followed a consistent pattern of higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend. They also indicate where the trend may change if the price breaks above or below them.
Moving averages – These lines plot the average value of a cryptocurrency over a specific duration. They smooth out the fluctuations of the value and display its overall direction. Based on whether they are above or below the current value, they can also function as dynamic support or resistance levels.
Fibonacci retracements – These horizontal lines divide a major price movement into various ratios depending on the Fibonacci sequence (a numerical series that commonly appears in nature). They indicate where the value might retreat or reverse after a significant rally or decline, serving as a useful tool for traders.
How to Apply Support and Resistance Trading Strategy in Cryptocurrency –
Support and resistance levels can assist you in identifying possible entry and exit points for your trades. Here are some primary suggestions on how to apply them –
- If you are bullish (anticipating the price to increase), you may search for purchasing possibilities close to support levels or after breakouts above resistance levels.
- If you are bearish (anticipating the price to decline), you may search for selling possibilities close to resistance levels or after breakouts below support levels.
- You can utilize support and resistance levels as targets for your stop loss or profit-taking orders. For instance, if you buy near a support level you can establish your profit objective near a resistance level or above it if you anticipate a breakout. Similarly if you sell near a resistance level you can set your profit objective near a support level or below it if you anticipate a breakout.
- You can also use support and resistance levels as indications of trend modifications or reversals. For example if the price of a cryptocurrency breaks below a significant support level or above a significant resistance level it may indicate a shift in the dominant trend from bullish to bearish or the opposite way around.
