Understanding Support and Resistance Levels in Crypto Trading

You have probably heard about the terms support and resistance levels from crypto traders when they talk. These terms refer to the price levels of cryptocurrency in the market. Understanding these concepts is crucial in conducting technical analysis.

Understand the basics of support and resistance levels to understand how it affects the decision-making process of crypto traders in this article.

Like what we have said, support and resistance levels concern the price value of an asset. Here, we will only focus on its application to cryptocurrency trading. According to Investopedia, support and resistance levels are like barriers that enclose the price value of crypto. So, in a trading chart, this is the only area where the price moves. The price does not go beyond this enclosure. To simply put, resistance acts as the price ceiling, and support acts as the floor. To visualize them, one can draw horizontal lines, rectangles, parallel channels, and trend lines on the chart connecting the points that hit the same price. The highest price points form the resistance level line, and the lowest price points form the support level line.

To know how strong the support or resistance level is, one must determine how often the price touches the said levels. In essence, if the price hits the support level multiple times, we can say that the support level is strong; the same goes with the resistance level. A strong level means it is close to accurate; thus, it better guides the traders in deciding whether to buy or sell crypto. Generally, traders buy crypto in high quantities when the price hits the support level because, at this point, the coin value is low. Medium supports this idea. They added that this results in high demand for crypto. Traders also tend to hold their crypto instead of selling it because it is not profitable. Support force exists because, at this point, many traders are holding their crypto, which translates to low supply. And when the supply is low, the price tends to increase, thus forming a floor. When the price hits it, the price tends to bounce upwards.

Understanding Support and Resistance Levels in Crypto Trading

In contrast, when the price hits the resistance level, traders tend to resist buying crypto because they think it is overpriced. Because of this, the supply increases, and the demand decreases. Traders tend to sell their crypto instead. Resistance comes into place because many traders are selling at this point, meaning supply is high. And when the supply is high, the price tends to stop increasing, thus forming a ceiling. When the price bumps to it, the price tends to bounce downwards.

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If the price starts breaking the support level, the price could go even lower. Conversely, if the price starts breaking the resistance, the price may continue to go up. The price breaking the support and resistance level could mean a massive change in the crypto market. Chart analysts from crypto trading platforms always watch out for these events as their next strategic moves depend on them. One can expect that the price will go higher if it breaks out to the resistance level, which means you can wait and hold your asset so you could sell it at a higher price in the relevant period. Experts suggest, however, that one must wait for the price to follow through because there is a concept called false breakout in which the price does not continue to go up.

For some traders, support and resistance level serve as a guide or signal for the best time to buy and sell a crypto asset. Usually, traders buy crypto when the price hits the support level; and they sell it when the price hits the resistance level. However, keep in mind that it should not be the sole basis in buying or selling. Of course, there are plenty of factors, signals, or indicators that one should consider. It includes trading volume, trends, RSI, etc. 

The decision to use support and resistance as a sole indicator depends on individual preference. As experts say, technical analysis is subjective. It depends on one’s style or strategy. Many experts believe that, as a trader, you must find the indicator that most often works for you. The gauges should be limited because including everything does not automatically result in a good outcome. Experts even call it analysis paralysis, a state of mind when traders think of too many indicators that they cannot even start trading. Others set at least three primary indicators to address this. The rest should only serve as a guide, but they should not directly affect your decision. Thinking of all the indicators is indeed time-consuming and overwhelming. That is why many successful traders rely on crypto trading platforms like Bitcoin Up to ease through it.

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