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Cryptocurrencies have gained immense popularity over the past couple of years. With a recent boom in crypto valuations, the net market cap of cryptocurrencies stands close to $640 billion, the highest level since January 2018. There were over 51 million crypto traders globally in 2019, with some reports suspecting levels as high as 68 million. As more traders join crypto trading, one of the most popular questions is whether conventional trading concepts apply to crypto trading. In this, crypto traders wonder if the support and resistance concept can be adopted to analyze crypto prices better.
Support and resistance refer to specific price points (areas in graphs) on trading charts that witness massive buying and selling activity. Support is a price level at which an asset’s price stops falling. Whereas resistance is a level at which the price of an asset stops rising.
This post aims to address whether technical indicators, such as support and resistance indicators, apply to crypto trading. The key areas of discussion include:
The trading industry uses a myriad of concepts to predict market movements. It is quite common to come across Wall Street posts indicating how critical technical indicators are flashing ‘buy’ or ‘sell signals.’
Support and resistance levels are among some of the most practiced technical indicators by traders. In simple terms, these are regions of a trading chart that hold upward or downward market movements during a given period. While some may define support and resistance as specific lines, others describe them as broader chart areas that witness most of the market movements at a given time.
Support is a price level in the trading chart beyond which an asset will not decline or fall. These levels often witness high buying activity. It is assumed that support level is a price point at which buyers are more inclined to purchase, and sellers are hesitant to sell, thereby pushing demand higher and the asset price along with it.
On the other hand, resistance is a price point that restricts any further upward movements in the price of an asset. Resistance levels often have access to supply and lower demand, which eventually pushes the price down.
Once a trend breaches support or resistance levels, the market moves in a particular direction, and new levels are formed.
While support is a price that restricts any downward movement of an asset, resistance is a price level that deters any upwards movements. Additionally, supply and demand behave differently at both these indicators. Support levels are marked with higher demand and lower asset supply, whereas resistance is marked with higher supply and lower demand levels.
For investors seeking to exploit the matrix, it is critical to focus on supply and demand at both levels. Using a price by volume chart (PBV) can help traders identify the correlation between supply and demand at support and resistance levels.
Support and resistance are technical indicators that can be applied to any form of trading. Since crypto trading involves all other conventional matrices, support and resistance indicators can naturally be utilized.
Although a significant difference between using support and resistance in crypto trading is the difficulty level. Compared to the traditional markets that operate for specific periods, crypto markets that are active 24/7 make the market analysis more intricate. As an investor, it could be slightly challenging to identify every support and resistance level for prolonged periods.
Starting with support, it is a price level with sufficient demand from buyers, preventing the asset price from going any further. Taking a look at this support chart, one can notice how the asset reverses a downward trend every time it touches 60. It indicates that buyers are more inclined to purchase the stock at this level.
Resistance is a price point that is hard to breach for an asset, accompanied by lower buyer demand and higher supply. In this example, the resistance is set close to $75, with the stock moving back to previous levels after touching resistance four times in a row.
There are several methods to find support and resistance levels.
One of the frequent methods to find support and resistance indicators is by analyzing highs and lows within specific periods. The highs indicate that maximum price points hit during a rally. While the lows indicate the lowest price points are hit during a downward trend.
If a particular asset observes the same lows and highs, these are often referred to as strong support and resistance levels, respectively.
The moving average (MA) indicator is another frequently used indicator for finding support and resistance. Depending on the types of moving averages indicators, traders use them to find long-term or short-term support and resistance levels. That includes 10-day, 20-day, 50-day, 100-day, 200-day moving averages.
When applied in crypto trading, moving average indicators allow traders to cut market noise. Ideally, shorter moving averages (10, 20, 50) are suitable for traders seeking quick profits, whereas longer moving averages are suitable for long-term investors.
The trendline indicator is quite similar to what we witness in horizontal support and resistance charts, except for sloping lines.
Here’s what a trendline indicator appears:
A look at the trendline reflects the support level across the chart. A similar trendline drawn across the high price points will act as the resistance level. When drawing trendlines, make sure to focus on significant price points (2-3) across a given period. So, if suitable, one can draw two parallel trendlines to identify a trading region.
Support and resistance can work exceptionally well with crypto trading. But, it is critical to choose a trading strategy before placing the orders.
Traders can use support and resistance indicators for crypto trading, as depicted below.
Here is a step-by-step outline for placing an order applying the support concept.
Pro Tip: Draw two parallel support lines to access a wider trading region.
Here is a step-by-step outline for placing an order applying the resistance concept.
Pro Tip: Traders can use bracket orders when using resistance levels for shorting.
Support and resistance indicators play a crucial role in determining a trader’s profit or loss in a given trade. However, it is essential to master the art of identifying support and resistance levels or having expert assistance.
It is vital to understand that these indicators provide a time-sensitive opportunity to book profits, exit/enter trades, but they will eventually change with every breakout. Learn to master these indicators for maximizing your crypto profits.