Support and resistance levels is a very important trend metrics for those interested in trading cryptocurrency. By learning how to use it properly you can identify further when to buy and sell with the most outcome.
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 share how to identify and use them to your advantage.
What is a support level in cryptocurrency trading
A crypto support level is the value which is currently believed that a cryptocurrency will not fall below. 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 how long exactly 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 perform well in your trading.
How can you find the support level
The easiest way for newly come traders to identify support levels is by comparing the 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 have the whole picture.
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 book of sell orders that may be blocking the asset 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 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 will help you to identify, what trend the asset is following, and you can decide where to place your buys and sells to make profit. If a cryptocurrency breaks its resistance level, then the old resistance level becomes 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 on 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 the part of the risk of trading cryptocurrencies.
How do you use support and resistance for crypto trading
You can use support levels you determine to plan when you will buy and sell. If you already have money on the market, then you may also look to pull that money out to protect it if you believe the support will be crossed. Likewise, you may want to put more money in if you believe that the resistance will be crossed 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 be traded 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 insights into how the asset 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 drastically the break movement could end up.
What happens when support becomes the resistance
If the value of a particular cryptocurrency drops below 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 support or resistance levels for a cryptocurrency. There are of course more that you can use, but these are some for a good start if you’re a beginner who is looking to learn some basic techniques.
Fibonacci Retracement - Traders using this indicator by taking 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 represents the averages for the highs, the lows, and the closing prices that occur within a trading session or a trading day.
Donchian Channels - Used to identify price breakouts that are either above or below the asset 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 to plan your trades because supply and demand can offer insights into what the support and resistance levels will become.
For example, if you see that demand has dropped out of the market, but a cryptocurrency asset is traded sideways, then you will likely see that the support level will be collapsed 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 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 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 how to draw a proper trend line is one of the first things you should do when learning to trade cryptocurrencies. If you use Bitsgap trading tools, then you can actually draw them right on 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.