Dennis Y.Tue, Nov 30, 2021 4:43 PM
Crypto Trading ABC: How to Find Support and Resistance Levels
Many experienced traders believe that technical analysis remains a relevant tool for understanding crypto. In some situations, it can be even more useful than for stock and forex markets.
How to find support and resistance levels?
Price is constantly shifting and building a graph, with peaks and dips. If you drag a line along with a consecutive series of these peaks and dips, that line will be exactly the resistance (support) line. At the points from these lines, the token price meets a significant obstacle, after which a reversal is possible.
Support zone/line/level is an area of significant demand, where buyers invade and push the price up.
Resistance is an area where price encounters a "roof". It's a zone of substantial supply, where sellers come into play and force the declining of the price.
The direction of a trend action can be practically defined by the inclination of the lines. If they are directed up, the trend is upward (bullish). This means that cryptocurrency trading is dominated by buying.
For a downward (bearish) trend, the situation is the reverse.
A sideways trend is a price action in which resistance or support lines are flat (or maybe almost horizontal) and there is an approximate equality of intentions to buy or sell a particular asset.
Why do we need to know the possible impact of support and resistance lines?
It is one of the conventional methods of market analysis. Moreover, it is an illustrative way to understand these main categories:
- Current trend
- Possible timing of joining the market
- Determination of points for closing orders with better results.
Mechanics of resistance and support lines
What do we mean when we talk about obstacles? It is usually a cluster of limit orders for a large amount. What happens in practice when the price comes to these lines?
The support line mechanics
These lines accumulate large amounts of limit buy orders as well as stop-loss orders. When the price goes down, these orders begin to execute. If there are considerably more of them than market orders, which actually lead the price downwards, the price decrease stops.
For example, the $1 million sales have met the $40 million wall of limit orders and "dissolved" in it. The total level has resisted, and there is $39 million left for the next tests and retests of this line.
The resistance line mechanics
Here it's the other way around. The price is proceeding up, but sellers have placed quite big Sale Limit Orders, so they are providing support. The price "bumps" but can't pass that wall. Then, the intensity of these actions decreases and a reversal occurs.
Visually, it will look like this: the price climbs to the nearest local resistance range and then sharply bounces down.
- Often, several approaches to that lines still end up with a breakdown of these lines. The limit orders are completed, and the price can freely move further.
- The more attempts to break the local level, the higher the chance of a breakthrough.
The screenshot shows how the sellers have won, and the buyers' desire to buy at current prices has disappeared. Because of this, it is frequent that the price, after breaching the level, runs much stronger than before the breakdown.
After the support line is penetrated, it may sometimes transform its function to the resistance level. That means the price will not be so strong to break through it. The next picture illustrates this example. Moreover, it's not a line, but an area. Often there isn't an exact price to the nearest 1 cent, it's usually an approximate range. And it's a common case.
Four basic strategies for trading by support and resistance levels
1. Trading in a price range
It's a fairly simple scheme. Orders to buy the asset are placed near the support lines. Sell orders are placed near resistance levels.
Trading in a price range
2. Trading on a Breakout and Pullback
We will not go into details here - you can find representative examples in our article on the triangle chart pattern.
3. Trade by Trend
If a steady trend is evident, for example, with rising lows, then buying, in this case, will be tied to this trend. It's a kind of combination of the previous points, but taking into account that every entry point on the uptrend can be higher.
It is extremely important to follow your risk management because the trend can unexpectedly collapse.
4. Using Moving Average Indicators as Support and Resistance Levels
One of the best indicators for support and resistance analysis is Moving Averages (MA). It can be managed as constantly changing and recalculated support and resistance levels. A list of popular options covers 20-MA, 50-MA, 100-MA, and 200-MA.
The support and resistance formulas help in most cases to understand what you can do on the market at the moment.
But, of course, you should not use them as the only ultimate tool. Only a comprehensive consideration of many market factors can help you make a profit.
These lines can't stay relevant forever. Sooner or later, any levels will be breached, and you should consider this fact when determining your approach.
What is the difference between support and resistance?
The support blocks the price from decreasing under a specific level, and resistance blocks the price from climbing beyond the conditional price "ceiling".
How do you determine strong support and resistance?
If the price numerous times meets the level, and it's still jumped back from it, and can't go further, then it is probably a strong level.
What is support and resistance strategy?
It's when your Buy and Sell points are led by sustained trending price maximums and minimums.
How do you describe support and resistance?
This is a 'wall' built of a cluster of large limit orders. Until these orders are filled, support (resistance) holds the defense.
Why are support and resistance important?
These categories help define the optimal price appropriate for buying assets under your considerations, or selling them and lessen the risk of loss.
How do you mark support and resistance?
If several points are observed from which the price just stops and then runs backward, then we can drag a line (or a slightly blurred range area) and then check how valid further price movements will be.