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.
This article aims to address whETHer technical indicators, such as support and resistance indicators, apply to crypto trading and if so, how to read support and resistance? Let’s get right into it!
What Are Support and Resistance?
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.
Does Support and Resistance Work in Crypto?
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.
How to Read Support and Resistance?
Support
Starting with support, it is a price level with sufficient demand from buyers, preventing the asset price from going any further. For instance, one can notice how an asset reverses a downward trend every time it touches the $50 level. It indicates that buyers are more inclined to purchase the asset at this level.
Resistance
Resistance is a price point that is hard to breach for an asset, accompanied by lower buyer demand and higher supply. For example, if an asset moves back to previous levels after touching the $65 level four times in a row, the $65 price point can be deemed as the resistance area.
How to Find Support and Resistance Levels?
There are several mETHods to find support and resistance levels.
The Highs and Lows
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.
Moving Average Indicator
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.
Trendline Indicator
The trendline indicator is quite similar to what we witness in horizontal support and resistance charts, except for sloping lines.
A 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.
Benefits of Trading with Support and Resistance
- Help to formulate a better trading strategy: Crypto trading is famous for its notoriously high volatility. Beginner investors may incur significant losses initially without a strategic approach. The use of these levels allows traders to create a trading plan or strategy to counteract the market volatility for greater profits. And to make the most logical decisions based on facts.
- Identify market trends: The ability to identify market trends is critical for any crypto trader. Support and resistance levels provide some insights into the ongoing market trends. For traders partaking in crypto futures trading, entering at the right time could mean significant profit potential.
- Provide critical entry and exit points: Traders use support and resistance indicators to identify the ideal entry and exit points. It helps an individual critically identify an opportunity to enter and exit a trade with a positive note. Traders also use long-term DMs (100-day, 200-day) for opening long positions.
- Risk management: It can act as robust risk management tools. For instance, a trader with a long position can open a stop-loss just below the support level, which will help the trader prevent significant losses in a downward rally. The same holds for a trader with a short position near the resistance level.
Closing Thoughts
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. Luckily for you, this article on how to read support and resistance is made free for you to reference frequently, such as while practicing with paper trading!
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.
