Crypto Trading: How to Trade Support and Resistance Levels
Are you struggling to make profits in the crypto markets? One of the crucial things to master as you find your footing in the crypto market is the art of learning to recognise and trade support and resistance levels.
If you are new to crypto trading, start with this post here.
In this article, we will teach you how to use and trade support and resistance levels, so you know when to buy or sell for the highest profit.
But, first things first!
What is a Support Level?
The support level of a cryptocurrency is the value that is currently believed to be the lowest value the asset can fall to – the floor of the market. As such, the support point is believed to be an ideal buying point or a safety zone.
How do you find the Support Level?
The best way for you to identify support levels is by comparing data from previous highs and lows. If you draw a trend line under the chart where support levels are being tested, you can get a good idea of where the market has been bouncing from.
This tactic is easy, but do not let it fool you. You might find it easy to draw a trend line, but predicting the future is not going to be that simple.
Remember to zoom out on the chart so you can get the whole picture before defining the support level. It is also a good idea to check how the cryptocurrency in question has responded in past situations. Learning this could help you predict future support levels or dangers that may arise in similar trading windows.
What is a Resistance Level?
A cryptocurrency resistance level is the opposite of a support level. While the support level is the floor of the market, the resistance level is the ceiling of the market.
At this level, the price of an asset is perceived as overvalued. Consequently, most buyers will exit their positions and take profit. Traders may also look for opportunities to enter “short” positions.
How do you Identify a Resistance Level?
The process of determining a resistance level is similar to that of identifying a support level; you analyse a chart and draw a horizontal trend line. However, when finding the resistance level, your line should be drawn at the top of the chart to trace the peaks (connect two or more points of inflexion in the market).
So, How do You Use Support and Resistance Levels in Crypto Trading?
Once you determine the support levels, you can use them to plan when you will buy or sell. For instance, if you're in a bullish market and price hits a strong resistance level with a bearish signal, you may take your profits out before it starts to retrace.
Similarly, if the crypto asset breaks the resistance level, and the new support holds, you might look for opportunities to add more long trades from the new support level.
What Happens When the Levels are Broken?
Once the levels are broken, it can be hard to tell how high or low the assets will go. However, after trading erratically for some time, new support and resistance levels will form, and the asset will either return to its previous levels or break out further.
Long term charts (day, weekly and monthly charts) can be instrumental when you want to find out how a cryptocurrency asset has responded to previous breaks. They can give you a baseline on which to gauge your next move and also help you predict the price movements with confidence.
Can You Use Indicators to Identify Support and Resistance?
While some experienced traders can draw trendlines manually, here are common indicators that can help you identify support or resistance levels with more accuracy:
To use this indicator, you pick two extreme pivots and divide the vertical distance using the established Fibonacci ratios. This indicator will help you identify support and resistance levels.
This indicator is used to identify price breakouts that happen above or below the assets price history. It will help you to plot the high and low boundaries.
Of course, there are other indicators you can use to determine support and resistance. The above two will get you started as you get accustomed to the crypto trading sphere.
What are some of the Best Support and Resistance Trading Strategies?
If the market is range-bound, traders will look for sell opportunities when the market bounces off resistance and buy opportunities when the price bounces off the support.
Usually, after some period of direction uncertainty, the market may experience a breakout and begin to trend up or down. Traders will watch the resistance or support levels for such price breakouts and take advantage of the increasing momentum in a particular direction. It’s advisable to wait for a pullback before you execute your trade to avoid false breakouts.
In the trendline strategy, traders simply draw a line connecting several lows in an uptrend or several highs in a downtrend (support and resistance). During strong market trends, prices tend to bounce off the trendline and continue moving in the direction of the trend. Consequently, traders will increase their chances of success by looking for trade opportunities in the direction of the trend. Remember the market is always right, and the trend is your friend.
Price trends are expected to take a breather once they come into contact with support and resistance lines because of the concentrated buying or selling pressure that awaits.
While these levels can act as barriers to price action for a considerable amount of time, they will eventually give way as the market absorbs their efforts.
To find high probability trading opportunities, practice identifying and drawing support and resistance levels, monitor price behaviour when it reaches these levels, and execute based on those setups.
Do you have any questions about how to trade support and resistance levels? Leave a comment below.
Want to learn more? Here are some other articles you might like:
Learn how to read different candlesticks (Beginners)
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About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Last updated: 22/08/2019