Cryptocurrency support and resistance levels - what are they?
Support and resistance levels are a very important trend metrics for those interested in trading cryptocurrency. By learning to use these properly you can then start to identify when to buy and sell for the most profitable trades.
Most cryptocurrencies follow a regular pattern, and traders who pay attention stand to profit. What do these terms mean though? How can you use these very important trading metrics to your advantage? In this article, we’ll explain what they are, and we’ll also tell you how to identify and use them to your advantage.
What is a support level in cryptocurrency trading
A crypto’s support level is the value which it is currently believed that a cryptocurrency will not fall beneath. This level is normally supported by a large amount of demand and buying activity because traders believe the asset is undervalued. This floor that is created is normally believed to be an excellent buying opportunity or at least a safety zone.
Most coin and token traders who are interested in day trading will try to use these levels to establish a baseline which can be used to gauge where the highs and lows are.
However, you should keep in mind that these are subject to change quickly, and there’s no guarantee of exactly how long a cryptocurrency will hold these support or resistance levels before moving up or down. You should use support level tracking in association with other indicators to do well on your trading.
How can you find the support level?
The easiest way for newcomer traders to begin to identify support levels is by comparing data from previous highs and lows. By drawing a trend line under the chart where support levels are being tested, you can get an idea of where they have been returning to.
The ease of this tactic, however, is deceptive. It’s easy to draw a trend line in retrospect because you already know what has happened. It’s much harder to predict what’s going to happen in the future, and there’s a lot of things which could alter the path of your support level trend line, so be careful.
When defining your support levels, it’s a good idea to zoom out in the chart and get the whole picture. While defining support levels within your trading window is important, there may also be some things that you might miss if you don’t look at the whole chart.
Make sure to see how the asset in question has responded in the past as well, as this could give you insight into future support levels or dangers that may not appear in smaller trading windows.
Crypto resistance level meaning
The resistance level is the opposite of the support level. Crypto traders are looking for indications that an asset will break resistance and go up in value. However, other traders are acting as “resistance”. They are selling their coins and tokens or closing their short positions.
In order for the value of an asset to go up, it needs to break through this barrier. This would include emptying the order books of sell orders that may be blocking the asset’s rise to new levels where a new and higher support level can be established.
How can you identify the resistance level?
The easiest way for traders to identify the coin or token’s resistance levels is exactly the same as what we suggested for support levels. You can analyze the chart and then draw a horizontal trend line. This time though, your line should be drawn at the top of the chart to trace the peaks.
Using this method you can begin to identify what trend the asset is following, and you can decide where to place your buys and sells to turn a profit. If a cryptocurrency managed to break its resistance level, then the old resistance level could become the new support if the demand is great enough to hold it there.
Do support and resistance levels work for Bitcoin only?
No, every cryptocurrency and even tradable assets in other markets will have these levels. How they respond may be different though, and you’ll need to spend your time familiarizing yourself with each of the ones that you want to trade. Some have a habit of repeating the same patterns reliably, but others could be more unpredictable. This is part of the risk of trading cryptocurrencies.
How do you use support and resistance for crypto trading?
You can use the support levels you determine to plan when you will buy and sell. If you already have money in the market, then you may also look to pull that money out to protect it if you believe the support will break. Likewise, you may want to put more money in if you believe that the resistance will break and the coin or token will increase in value.
Depending on how strong the break is, it could result in significant profit or loss. You could also use support levels indicators for shorting in order to take advantage of the aftermath of a break.
What happens when the levels are broken?
When the levels are broken it’s hard to say how high or low the crypto asset in question will go. However, it will trade erratically for a bit, and then a new resistance and support levels are determined by the market based on the current sentiment. The asset could return to previous levels or it could break out further.
For more insight into how an asset has responded to previous breaks, you could try looking at the long-term charts. This might give you a little bit of a baseline to decide how to make your next move and how drastic the break’s movement could end up being.
What happens when support becomes the resistance?
If the value of a particular cryptocurrency drops beneath a certain point, then what was the support could become the new resistance. Sometimes if there is enough negativity after the support is lost, then the asset could continue to fall to more dangerous levels.
Popular support and resistance indicators
Here’s a few indicators which can help you to find the support or the resistance level for a cryptocurrency. There are of course more that you can use, but these are a good start if you’re a beginner that is looking to learn some basic techniques.
Fibonacci Retracement - Traders using this indicator take two extreme points, and then divide the vertical distance using the established key Fibonacci ratios. This allows traders to figure out where to draw the horizontal lines needed to establish support and resistance levels.
Pivot Points - This indicator pivot point and the period’s last levels. Can be used to establish resistance or support.
Donchian Channels - Used to identify price breakouts that are either above or below the asset’s price history. It helps traders to plot the high and low boundaries.
Support and resistance vs supply and demand
While support & resistance and supply & demand have a relationship, they are different. You should use both to help plan your trades because supply and demand can offer insights into what the support and resistance levels will become.
For example, if you have seen that the demand has dropped out of the market, but a cryptocurrency asset is trading sideways, then you will likely see that the support level will collapse soon, though it may take a while for it to catch up.
What are support and resistance trend lines
The support and resistance trend lines are the horizontal lines which are drawn at the top and bottom of a chart. Using these lines traders and investors can plot where the support and resistance levels of a cryptocurrency are.
This can then be used as a guide to decide where to buy or sell coins or tokens. These typically trace the peaks, both high and low in order to draw out a line of the path that the asset is traveling throughout its price history.
Learning to draw a proper trend line is one of the first things you should do when learning to trade cryptocurrencies. If you use Bitsgap’s trading tools, then you can actually draw them right on the live charts! This means that you don’t need any outside software, and you can do your practice TA using a Bitsgap demo account on a live trading chart until you’re ready to trade for real.