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:
What Are Support and Resistance?
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.
Support vs. Resistance: The Differences
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.
Can Support and Resistance Apply in Crypto Trading?
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 Do Support and Resistance Look Like?
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.
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.
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.
Benefits 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 counter-react 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.
The Risk of Trading with Support and Resistance
- False breakouts: It is quite common for crypto prices to go slightly above the resistance or below the support level to retract to the support and resistance levels later. With that, it can create slight confusion for novice traders. Also, if a trader has a stop loss set right below the support price or a short-order set following the current resistance level, false breakouts can trigger substantial losses. New crypto traders must be cautious when using these indicators for trading.
- Challenging to find support and resistance levels: Identifying the support and resistance levels reflects a complex process. A beginner may find it difficult to determine the precision of the optimal levels. Trading with inaccurate indicators could quickly turn into significant losses or, worst, triggering asset liquidation.
Step-by-step Guide to Crypto Trade with Support and Resistance
Support and resistance can work exceptionally well with crypto trading. But, it is critical to choose a trading strategy before placing the orders.
- Range trading: If the market witnesses a broad-range activity, traders’ ideal strategy is to purchase near support levels and sell below resistance. In the case of short-selling, the same principle is applied in reverse.
- Trendline trading: If the market observes a strong trend, traders can benefit by trading along the trendline, both in the upward and downward direction. In the chart below, one can witness an upward trend. Based on the trendline strategy, traders should open positions every time the market bounces off the support line.
Traders can use support and resistance indicators for crypto trading, as depicted below.
How to use support levels for crypto trading
- Entering new long positions: A crypto trader can initiate a long position just above the support level. The trick is to purchase the desired cryptocurrency as soon as the price bounces off the support level, ensuring an upward trend.
- Stop-loss orders: When placing a buy order, a trader can place a stop-loss order right below the support level to limit losses in case of a downward trend.
Here is a step-by-step outline for placing an order applying the support concept.
- Identify support and resistance levels using one of the methods discussed above (trendline, highs, lows, or MA).
- Place a purchase order just above the support level. Ideally, the trader should wait until the price bounces off the support line.
- Place a stop-loss order just below the support level to rule out any chances of loss.
- Place a take-profit order just below the resistance level. The idea behind the take-profit order is to auto-sell the crypto asset once the desired price is reached.
Pro Tip: Draw two parallel support lines to access a wider trading region.
How to use resistance levels for crypto trading
- Entering short positions: Resistance levels can help a trader identify the right time for short selling. The trader can enter a short position just below the resistance level, expecting that the price will go down.
- Exiting long positions: For crypto traders with long positions, if a crypto asset fails to breach a resistance level multiple times, it indicates close long positions.
- Booking profits: For intraday crypto trading, the resistance level helps traders to book profit at the right moment. Traders can create a sell stop order to book profits near the resistance level.
Here is a step-by-step outline for placing an order applying the resistance concept.
- Place a stop-sell or limit-sell order just below the resistance line.
- Put a stop-buy order just above the resistance line to prevent any excessive losses in case of an upward trend.
- Place a purchase order just above support level once the stock reaches the support-resistance band’s lower area.
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.