Understanding Resistance And Support For Effective Crypto Trading

Support and resistance are the bread and butter of technical analysis – they are the most widely used levels in trading.

It would be difficult to form a profitable trading strategy without knowing how support and resistance work. Buying at support (low price) and selling at resistance (high price) is a basic trading principle that necessitates the need to understand the two concepts of a profitable trade.

How do support and resistance affect your trades? Keep reading to learn more.

What is Support?

Support is a price level where a downtrend should have a time obstruction or full reversal. The level is created by buyers looking to buy a crypto token at a lower price when it is undervalued.

Suppose buyers buy bitcoin (BTC) at price X, causing the price of BTC to rise; they will try to defend their position at price X and possibly add to their positions each time the price returns to point X. Since they were able to push the price of BTC at first so that it could not fall in below price X, buyers will see such a point as a safe level to add more buying pressure. The buying pressure prevents the price from falling further, creating the temporary barrier known as support.

What is resistance?

Resistance is a price level where an uptrend or bullish move is expected to reverse or have a temporary barrier. The resistance level is usually the point where there are many sell orders.

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When an asset is overvalued, sellers try to take advantage of it. Buyers would also start looking to exit their positions and take their profits. Some of them might even enter a sell position at the price level. Just like buying pressure (in the case of support), selling pressure also forms a barrier usually called resistance.

Price usually respects support and resistance levels until it breaks them. Traditionally, support and resistance levels are indicated by lines, although these levels are not accurate in real life situations. It’s best to think of support and resistance as areas or zones rather than lines – they’re more like a price range in a chart that acts like a wall.

Identify support and resistance

There are many ways to identify support and resistance levels on a crypto price chart. We can classify these ways into two: the psychological resistance and support levels that we create by our way of thinking, and the trading indicators that have been constructed to identify them. We will briefly look at this psychological factor and how two of the many technical indicators identify support and resistance.

Round numbers (psychological support and resistance)

The round numbers usually serve as resistance and support as prices struggle to break above them. They are sometimes called psychological support and resistance zones because they don’t necessarily correspond to a technical pattern on the chart – they are in our minds.

Many of us prefer buying things at round prices like $35 and $50 rather than buying at $34.67 or $49.26. This preference drives us to place orders in round numbers. Having more orders at these points creates price barriers. If many buyers execute a buy order at, say, $50 as the price of a crypto token drops towards $50, those orders could serve as a wall creating support at that level.

The big players in the forex and stock market (big banks, large corporations and financial institutions) also deal in round numbers, which makes these points very important in these markets.

trend line

A trendline is especially useful in trending markets. It identifies support and resistance areas that coincide with them.

From the chart above, the price continues to bounce off the trend line (which shows the resistance levels) and presents a selling opportunity at each point. Traders would only have to look for other additional confirmations to place their orders.

Moving average

A moving average is one of the most popular indicators that traders use to identify support and resistance. It acts as support or resistance to the price. The moving average is also useful for spotting trend reversals or a pivot point on the chart.

The price has bounced off the moving average at various points in the chart above. In this case, it helps to identify important resistance levels.

Other indicators

Many other indicators also help identify key levels on the crypto price chart. Taking the Relative Strength Index (RSI), for example, many traders consider four main points:

  • Oversold positions (under RSI 30)
  • The seller’s market (RSI 50 to 30)
  • The buyer’s market (RSI 50 to 70)
  • The oversold position (RSI 70 to 100)

These levels also serve as resistance and support on their own.

You can use other technical indicators, line tools, price actions and many other tools to determine these important price levels. You just need to identify the one that suits you best.

There are many ways to trade support and resistance. In fact, if you ask 20 traders how they trade support and resistance, you might get 20 different answers. Two things might only be common to most of them, forming the main things people do around support and resistance: traders can place trades after a bounce or after a breakout. We will explain these two concepts below.

After a bounce

One of the main ways to trade using resistance and support is to wait for a price bounce and then get confirmation to place an order. Since there is a chance of the price reversing, you could simply wait for the reversal and then find some kind of confirmation before taking the trade.

Why wait for confirmation? A confirmation is necessary because not all supports or resistances hold. It is best to confirm if the odds are in our favor before entering a position. We don’t want to assume that price will automatically bounce off our support or resistance level, but we want to see it bounce back and give us more information before entering a trade.

After an escape

Support and resistance levels don’t hold all the time – they often break. Such a breakout presents trading opportunities as traders begin to look forward to trading in the new price areas. At this point, all we do is wait to be sure price has broken the dots, then try to find an entry when we get more confirmations.

When there is a price breakout, there may be a pullback before the price continues to move. For example, when the support is broken there is a possibility of a pullback, some traders call this a “retest”. The pullback takes the price back to the last broken support, which would have become resistance, before continuing its move. What we could do to execute a trade is wait for the withdrawal and then look for confirmation to enter. Some traders also enter headlong immediately after a breakout – this is a more aggressive approach.

Former price resistance areas, which were broken in an uptrend, become the support towards which the price could retrace. The reverse is also true in a downtrend; the broken support acts as a resistance which should hold the price.

Understanding support and resistance is not enough

Support and resistance form the basis of technical analysis. They are integrated into most trading strategies. The price can respect these levels or break the levels. Since price will not always respect support and resistance levels, you need to have proper risk management strategies in place to limit losses when a trade does not turn out in your favor.

Identifying support and resistance alone does not guarantee successful trading. It is a basic skill to have as a trader. There are many other trading concepts to learn, such as price action, risk management, and trading psychology. You should also learn various confirmation strategies to combine with support and resistance before entering into a trade.

You should only make trading decisions after determining the direction of the market using a combination of tools and not relying on just one tool. If you don’t have time to learn or master trading, you can ask a robot to do the trading for you. This method does not require any analysis.


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Understanding Resistance And Support For Effective Crypto Trading


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