Understanding support and resistance in crypto

One of the most useful things you can have as a cryptocurrency trader is the ability to understand price charts — and in particular their support and resistance levels. These things help us determine the limits of a market’s movements, which we can use to make sensible predictions about how the value of a cryptocurrency could fluctuate in the future.

It is impossible to guarantee how a cryptocurrency’s price will change over the coming days and weeks, of course, so the best we can do is make educated guesses. Using support and resistance lines helps us do that by providing us with a guide to a cryptocurrency’s lowest value and its highest value based on historical price chart movements.

In this AAG Academy guide, we’ll explain what support and resistance levels are, how to recognize them, and how to use them when trading.

What are crypto trading indicators?

Regardless of how long you’ve been trading cryptocurrency, or how much money you might have made as a result, you cannot be completely sure of how the value of a particular asset is going to change — and whether or not it is worth trading. Without a time machine, it is simply impossible. However, that doesn’t mean that our trading activities should be entirely random.

Sensible traders look to minimize their losses by properly researching their moves ahead of time. This allows them to make educated guesses about how a cryptocurrency’s price will fluctuate in the future. One of the best ways to do this is by using cryptocurrency trading indicators to help us better understand the market and where it is headed.

These indicators, of which there are a number of common types — such as moving averages (MA), the Fear & Greed Index, the Relative Strength Index (RSI), and more — can be used to determine when it is a good time to buy cryptocurrency, and when it is a good time to sell. Some can also help us establish support and resistance lines that can be invaluable on their own.

Support and resistance levels tell us the limits of an asset’s movements based on historical price data. We can use these to predict whether prices might rise or fall in the future, and therefore whether it is a good time to buy, sell, or avoid a particular cryptocurrency.

What are support and resistance levels?

The support level is where the price of a cryptocurrency tends to stop falling and then bounces back up. The resistance level is the opposite of that; this is where the price of a cryptocurrency tends to stop rising and then starts to dip back down. The more often the price hits these levels, the more reliable they can be in predicting future price movements.

A major factor in all of this is a psychological one: When traders see strong support and resistance levels, they will often consider them to be barriers to a cryptocurrency’s value. In other words, they tend to buy when the price falls to its support level, and sell when the price climbs back up to its resistance level. However, these levels are not set in stone.

At any time, the value of a cryptocurrency can fall beyond its support value or rise above its resistance value. When this happens for only a brief period of time before quickly bouncing back, the price is seen as “testing” its levels. However, when it happens for a prolonged period of time, the price is likely to keep falling or keep rising until a new level is established.

Support and resistance levels are essentially set by supply and demand. When the support level is reached, traders and investors believe it is a good time to buy, and therefore demand increases and the cryptocurrency’s value follows suit. When the resistance level is reached, it is believed to be a good time to sell, so demand decreases and prices start to reflect that.

How to find support and resistance lines

Support and resistance levels or lines can be identified in any chart that shows price data over a period of time, including hourly, daily, and monthly periods. You can even identify support and resistance levels in charts that show price data in minutes, however, the longer the time period, the more significant (and therefore more reliable) support and resistance levels become.

Many price charts or technical indicators will determine and display support and resistance lines for you, negating the need to identify them yourself. However, when you need to find the levels manually, you’ll be pleased to know the process is relatively simple. There are three common indicators you can use:

Peaks and troughs
First, select a timeframe on the price chart. Then, identify the highest peak on the chart and the lowest trough. Mark each peak and trough. When there is a downward trend, the support level will be the lower-low peak and the resistance level will be the lower-high peak. With an upward trend, the support level will be the higher-low peak and the resistance level will be the higher-high peak.

Moving averages
By viewing the moving averages on a price chart, you can identify support and resistance by drawing a diagonal line from the lowest peak to the highest peak to see which way the trend is moving. If the line moves up, the moving average line acts as the level of support. If the line moves down, the moving average line acts as the level of resistance.

Not that this is considered a dynamic level of support and resistance because it is constantly changing alongside the moving average.

Trend lines
In much the same way as the moving averages method above, you can look at trend lines for a cryptocurrency’s price and then draw a support and resistance line onto the chart. You’ll need at least three peaks or three troughs to establish a usable level. Once it is drawn, an upward trend line can be used as your support line, and the downward trend line can be used for resistance.

How to use support and resistance lines when trading

Given that support and resistance levels are relatively easy to understand, they are one of the simplest methods you can use in trading — especially if you’re a beginner. They clearly and effectively help us determine market conditions, including the potential high and potential low of a cryptocurrency’s value in the future, and when you can expect changes in demand.

The most common method of trading using support and resistance lines is to buy an asset when its price is at or nearing its support line, and sell an asset when it reaches or is near to its resistance line. Although it is possible that the price of the cryptocurrency will break through these lines, it will often be temporary. As we noted above, however, that’s not always the case.

It is important to bear in mind when using support and resistance lines for trading that they always have the potential to change. Although they can be reliable indicators — and that’s why they are so commonly used — a cryptocurrency’s value can drop well below its support line or rise well above its resistance line for long periods due to all manner of market conditions.

References

• Support and resistance levels explained
• Support and resistance basics
• Best indicators for crypto trading