Key Takeaways
-
A support level is the price point at which an asset is expected to experience significant buying pressure; hence, it fails to break below.
-
A resistance level is the price point at which an asset is expected to experience significant selling pressure, hence failing to break above.
-
Round numbers, moving averages, trendlines, pivot levels, and historical data are the common indicators for finding support and resistance levels.
-
Stops and limits, pending orders, and corrective structures are the main support and resistance strategies to execute key price points better.
Technical analysis is a key aspect of analyzing the market behavior of cryptocurrencies. Out of all the available market indicators, price is the only leading indicator. The rest are classified as price derivatives, hence, are lagging indicators. Now that price is the only leading indicator in the market, how can you use it to make informed investment decisions in crypto trading? This is where technical analysis comes in.
Although technical analysis involves all sorts of indicators, it's primarily observing price movement to establish trends and make wise investment decisions. Moreover, out of all the price-based technical analysis methods, the principle of support and resistance is among the most essential and popular techniques. It can help you gain more insights into the strength of a price trend.
This guide comprehensively defines support and resistance levels, explains how to use round numbers, moving averages, trendlines, pivot levels, and historical data to find support and resistance levels, and provides support and resistance strategies.
What is a Support Level?
In crypto trading, support is the price level at which an asset is expected to experience significant buying pressure. In other words, a region where a bearish trend is thought to experience temporary resistance or total reversal. When an asset's price falls to this level, it is often met with many buyers interested in purchasing it, resulting in a reversal of the downtrend and a subsequent increase in price.
You can use support levels to identify potential entry points for buying an asset. For instance, if you want to buy a particular investment, you can enter the trade when the asset's price reaches a support level. It indicates a potential reversal of the downtrend and a good opportunity to buy at a lower price.
Several factors can contribute to the establishment of a support level. One of the most important is market sentiment. If many traders and investors believe that a particular asset is undervalued and should be trading at a higher price, they may be more likely to buy it when the price falls to a certain point, creating a support level.
Another factor that can contribute to the establishment of a support level is technical analysis. Traders often use technical indicators and chart patterns, such as round numbers, moving averages, trendlines, pivot levels, and historical data, to identify potential support and resistance levels. For example, you can search for zones where the price has previously bounced off multiple times, indicating that it is a strong support level.
What is a Resistance Level?
Contrary to support, a resistance level is the price point at which an asset is expected to experience significant selling pressure. It's a zone where a bullish trend is thought to experience temporary resistance or total reversal. When an asset's price reaches this level, it is often met with many sellers interested in selling it, resulting in a reversal of the uptrend and a subsequent price decline.
You can leverage resistance levels to spot potential exit points for selling an asset. If you're holding a particular asset, you can aim to sell it when the price reaches a resistance level. This indicates a potential reversal of the uptrend and a good opportunity to sell at a higher price.
It's important to note that support and resistance levels are unreliable indicators of future price movements. Just because an asset has bounced off a certain price level in the past does not necessarily mean it will do so again. These levels can also be broken if there is a significant shift in market sentiment or other factors that influence crypto markets.
There are five common indicators for finding the support and resistance levels of an asset:
Round Numbers
Round numbers are key psychological price levels often ending in 0, such as $10,000 or $12.50. Humans often think in rounded numbers, which is also true with financial markets. Since it's easier to visualize round numbers, most traders buy and sell assets when the prices hit round numbers. For instance, if Bitcoin (BTC) rallies from $27000 to $28800, the next key resistance level might be between $27500
To use round numbers to detect support and resistance levels, you first need to identify the key round numbers for the cryptocurrency you're trading. These differ for different assets, depending on their price history and volatility.
Once you've identified the key round numbers, you can look at the price chart for the asset and see where it has previously bounced off or broken through. For example, if BTC has previously bounced off at the $22,500 level severally, you can consider it as a strong support level.
Similarly, if the price of BTC has repeatedly failed to break through a round number like $28,000, you can consider that a strong resistance level.
Moving Averages
Moving averages is a popular technical indicator you can use to identify trends and potential support and resistance levels in financial markets. A moving average is an average price of an asset over a set period that is constantly updated as new data becomes available. There are two main types of moving averages: the simple moving average (SMA) and the exponential moving average (EMA).
You can calculate the SMA by taking the average price of an asset over a specific period, such as the past 50 days, and plotting it on the price chart as a line. On the other hand, the EMA places more emphasis on recent price data. You can calculate it using the SMA formula but using the most current prices. This means that the EMA can be more responsive to changes in the market than the SMA.
To use moving averages to identify support and resistance levels, you should look for regions where the asset's price has previously bounced off a moving average. For example, if the price of a cryptocurrency has repeatedly bounced off the 50-day SMA, you might consider it a strong level of support. Similarly, if the asset's price has repeatedly failed to break through the 200-day EMA, you might consider it a strong resistance level.
Trendlines
Trendlines are easily recognizable diagonal lines you draw on price charts to link price actions and illustrate uptrends and downtrends. Trendlines can be a useful tool for identifying potential support and resistance levels in crypto trading. Follow these steps to use trendlines effectively:
Step 1: Identify a Trend
The first step is to identify a trend in the asset price you are trading. If the line slopes upwards, the trend is considered bullish. If it slopes downwards, the trend is considered bearish.
Step 2: Draw the Trendline
Once you have identified the trend, draw a line that connects the lows in an uptrend or the highs in a downtrend. This line will serve as your trendline.
Step 3: Look for Support and Resistance Levels
The trendline can act as a support or resistance level depending on the direction of the trend. In an uptrend, the trendline is a support level; in a downtrend, it is a resistance level. Look for areas where the price touches or crosses the trendline. These are the potential support or resistance levels.
Pivot Levels
Pivot points are a widely used technical analysis tool to determine potential support and resistance levels. You calculate them based on the previous day's high, low, and closing prices. Here are the steps to use pivot levels as an indicator to find support and resistance levels in trading:
Calculate Pivot Points
Pivot points are calculated based on the previous day's high, low, and close prices. There are several ways to calculate pivot points, but the most common method is the Standard Pivot Point Formula (SPPF), which is:
Pivot Point (PP) = (High + Low + Close) / 3
Find the Support and Resistance Levels
Once you have calculated the pivot point, you can find the support and resistance levels using the following formulas:
Resistance level 1 (R1) = (2 x PP) - Low
Resistance level 2 (R2) = PP + (High - Low)
Resistance level 3 (R3) = High + 2 x (PP - Low).
Support level 1 (S1) = (2 x PP) - High
Support level 2 (S2) = PP - (High - Low)
Support level 3 (S3) = Low - 2 x (High - PP)
Look for Potential Levels
The support and resistance levels can act as potential levels for entering or exiting trades. If the price approaches a resistance level, it may be a good time to sell the asset or place a short position. Conversely, if the price approaches a support level, it may be a good time to buy the cryptocurrency or enter a long position.
Historical Data
Historical data in cryptocurrency refers to the record of past price and volume movements of a particular crypto asset. This data is collected and stored in blockchain data aggregator platforms, allowing traders, investors, and analysts to study the behavior of the cryptocurrency over time. Here are some steps you can take to use historical data to identify support and resistance levels:
Collect Historical Price Data
To find support and resistance levels, you must collect historical price data for the cryptocurrency you are interested in trading. CoinGecko is the world's leading independent blockchain data aggregator platform tracking over 11,000 cryptocurrencies across 600+ exchanges.
Plot the Data on a Chart
Once you have collected the historical price data, you can plot it on a chart to visualize the price movements over time. You can use a candlestick chart, line chart, or another type of chart to display the data.
Identify Key Price Levels
Look for areas on the chart where the price has repeatedly bounced off or struggled to move past. These levels are known as support and resistance levels, respectively.
Draw Lines to Connect the Levels
Once you have identified the key support and resistance levels, you can draw horizontal lines to connect them on the chart. This will help you visualize the price range which the asset has been trading within.
Use the Levels to Inform Your Trades
You can use the support and resistance levels to enrich your trading decisions. For example, consider selling or shorting the asset if the cryptocurrency's price is approaching a resistance level. Conversely, if the price is approaching a support level, consider buying or going long on the asset.
It's important to note that support and resistance levels are not exact price points but rather price ranges where buying or selling pressure has been historically significant. Additionally, historical support and resistance levels may not hold up in the future, so it's important to combine them with other indicators in your trading analysis and rely on something other than them.
Support and Resistance Strategies
Support and resistance strategies refer to using key levels on a price chart where buying and selling pressure is concentrated. You can use these levels to make informed investment decisions. Below are three support and resistance strategies that will help you better execute your trades:
Stops and Limits
Stops and limits are important risk management tools in trading to help traders manage potential losses and profits. A stop order is a type of order that automatically closes a trade when the market price reaches a specified level. On the other hand, a limit order is an order to buy or sell an asset at a set price or better. This strategy will help you to better manage your profits and losses after identifying support and resistance levels.
Pending Orders
Pending orders are orders placed to buy or sell an asset at a specified price. Traders use these orders to enter or exit a trade when the price reaches a specific level. You can use them to enter a trade when the price breaks through a resistance level or exit a trade when it reaches a pre-determined profit target.
Corrective Structures
Collective structures are price patterns that occur during price corrections or market retracements. These structures are used by traders to identify potential areas of support or resistance and to make decisions about when to enter or exit trades.
Corrective structures can be simple, such as a basic pullback, or more complex, such as a double or triple zigzag correction. You can use them to identify potential support or resistance areas and make informed trading decisions.
Conclusion
Support and resistance levels act as a foundation for technical analysis; hence, you should master them early enough in your trading journey. A support level is the price point where the price fails to break below, while a resistance level is where the price fails to break above regularly. Confirming potential support and resistance levels with multiple technical indicators, such as moving averages, round numbers, trendlines, pivot levels, and historical data will help to increase the accuracy of your analysis.
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001
Or check it out in the app stores
