In the following paragraphs, we are going to discuss the concept of support and resistance levels, as well as the ways in which traders can utilize these levels to create more profitable trades.
In order to make our discussion of support and resistance levels and their applications as clear and concise as possible, we will do so in the following sequence:
- What are the different Levels of Support and Resistance How to Use Them to Trade Crypto? of support?
- What exactly are the levels of resistance?
- How do levels of support and resistance manifest themselves in the market?
- Common trading tactics available to investors and traders
There are a few things that come to mind for the majority of people when they hear the term "Cryptocurrency Trading." Many people would have no trouble associating the phrase cryptocurrency with Bitcoin or Ethereum, and a somewhat greater proportion of those people would be able to provide a very broad notion of how it is supposed to work, which is to buy low and sell high.
The fact that a word is utilized in your terminology that is common knowledge is beneficial in this regard. The term "trading" in the phrase "cryptocurrency trading" tells us that it is going to be based on the concept of purchasing a certain item when its value is low and selling it when its value is high. This is the basis for the trading strategy known as "buy low, sell high."
You will, however, need to get familiar with terminology that is unique to the sector as you delve more into the very general idea of what we have just explained. While a discussion of the benefits and drawbacks of the terminology game in and of itself is more appropriate for an article centered on literature, the primary focus of this article will be on the meanings of the terms support levels and resistance levels, as well as how using them can be helpful to traders.
What are the different degrees of support?
First things first, let's take a moment to discuss what Support Levels actually are. Support is a slang term for the point at which the price of a security no longer tends to decrease but instead remains'supported.'. It occurs when the supply of goods available from those who are selling a certain security meets the demand for that security from those who are purchasing it from the market.
To provide a bit more clarity on the topic, support levels are defined as levels that it is not anticipated that the price of a specific security will fall below. Since they are unique to each security, the support levels for cryptocurrencies will each be determined independently because of their individual nature.
There is a need for support levels due to the fact that when the price of a particular asset goes down, an increasing number of individuals become aware of the trend and desire to purchase the asset at the lower price. The price of the security does not continue to decline as the security gets positive momentum, and as a result, it reaches a point where the sellers who are selling it are met by an equal demand from the purchasers. As a result of this, there will come a region from where it is not anticipated that the price would drop any further.
Therefore, support levels denote the area in which the minimum price of the security will reside. This enables traders to determine for themselves whether or not they want to enter the market by purchasing the particular security at that price. It is important to keep in mind that investors can buy the majority of assets at any time they want; nevertheless, the support levels are typically where many investors go to make a decision because it is the lowest price under which it is not anticipated that the asset will fall in value.
Hence, we now have a new way of thinking about where people can enter and leave the building. An investor or trader enters a position in a certain security at some point in time, which is referred to as the entry point. Both of these terms give away the meaning of the term. An example of an entry point would be the purchase of 0.020 BTC at a price of X. In contrast, an exit point would be the place when a trader sells the position they have been holding.
When concentrating on support levels, it is essential to take note of and make a connection to the fact that support levels are often the ones that one looks at when contemplating entering a trade because that is when the assets will be at their lowest value. It is important to keep in mind, however, that entry points are not restricted to the sole purpose of being places at which a trader "buys" assets. Additionally, it may relate to the investor selling their shares.
Therefore, a definition that is better suited would be the point at which the investor or trader enters in order to commence their trading activity. This would be a more appropriate definition. Given the significance of the price at which you purchase or sell an item for the first time, the "entry point" is frequently a significant component that should be thought about when attempting to forecast whether or not a certain trading transaction will be profitable.
What exactly do Resistance Levels involve?
The price of a specific security will encounter "resistance" at certain points along its upward trajectory, and those are the places that are referred to as the "Resistance Levels." They are simply the points at which it is not anticipated that the price of the asset will continue to climb. They are around because a significant number of people are interested in selling because the prices of that particular security are so high.
To expand further, resistance levels are achieved when the price of a specific security has climbed to the point where the owners of the security believe that selling it at that point would generate the highest possible profit. For instance, many investors who purchased an asset X when it was priced at $0.4 USD are beginning to liquidate their holdings now that the asset's price has hit $0.9 USD because they believe it has reached its peak.
When something like this occurs, we almost always observe that the price of that particular asset does not continue to climb from that point on. This is due to the fact that, as was stated before, the price of the security is encountering "resistance" when trying to climb higher. As a result, resistance levels typically mark the top end of the price swing, which is the point from which it is not predicted that the price of the security would rise, but rather decrease.
Traders can also use the Resistance Levels to discover appropriate entry and exit locations. Resistance levels, which mark the highest end of a security's price value, can allow traders to open a selling position. Furthermore, it can instruct others on how to use the information about the Resistance Level to determine whether or not it is a good time to acquire a specific investment.
How does market Support and Resistance Levels work?
You may be beginning to realize why support and resistance levels are so crucial now that we understand what they are. If one can utilize past trends to predict where support and resistance levels will be, one can predict likely maximum and lowest price values for a cryptocurrency asset and so plan how they will trade that asset.
It is important to keep in mind, however, that, as was stated previously, the levels of support and resistance are determined based on the historical performances of securities. They are based on the premise that market influences will remain largely consistent, so keep that in mind. It's only then that the previous data can build an accurate picture of what the future might look like.
Now that we know that support levels can be thought of as the'minimum' and resistance levels as the'maximum,' let's have a look at how this is actually seen in the bitcoin market. After all, even if they are based on the same concepts, theory and practice can appear very different.
Let's think about the first idea we haven't talked about yet, which could be best shown with an example. Let's pretend that a fictional Coin XYZ starts at $0.1 and reaches a high of $0.41 on Monday. The following day, the value of the currency XYZ continues to increase, reaching a high of $0.43 at the end of the day. The following day, it reached its highest point of $0.42.
Resistance levels aren't always perfect, as seen by the fact that maximum values might fluctuate significantly while remaining quite near to one another. They could be straight lines on a graph beyond which a security's price does not increase. In most cases, however, we find a resistance area rather than a resistance level. This zone is defined as the'somewhat' region beyond which the price of a certain security is not projected to rise.
The same is true for the support level. The level of support may change slightly from time to time, but it can generally be described as lying in one place.
Let's move on to another key characteristic we witness in actual markets: trends.
So far, we've talked about static and somewhat static barriers (in the shape of resistance zones and support zones) that determine how far a security's price can move up or down. If the conditions influencing the position of support and resistance levels stayed the same, these would stay in place and remain relatively stable.
There is, however, a significant shift in resistance and support levels from where they were before. Trendlines are a new concept to me.
You may have noticed that many cryptocurrency aficionados compare the price of Bitcoin to its value in 2008 to the current price. From a few fractions of a dollar to tens of thousands of dollars at the time of writing this article. Clearly, BTC did not have a resistance level of $40,000 USD in 2008, indicating that its price could go up there one day. Instead, its cost increased over time. With its price, it brought with it price barriers of support and resistance.
Trendlines can be drawn with a gradual increase in both the support and resistance levels. In the next paragraphs, you will see how vital they are to trading, as you will quickly discover they are highly useful tools for traders to determine the pricing worth of a given security.
In most cases, support and resistance levels can be seen rising and falling in a trend. Analysts can draw lines linking all of the support or resistance levels, forming a reasonably straight trajectory that can be used to forecast future support or resistance levels. This will provide more data to numerous traders, allowing them to make more confident transactions.
A good real-world example is how when a market is generally trending, the value of many securities within it goes up by an exponential amount. Depending on the security's price, this could go much above the projected resistance level. Although resistance and support levels can be very useful indicators, they don't guarantee the maximum or minimum price of an asset.
Nonetheless, let's return to the scenario. Experts look for the resistance trendline while the price of a security climbs rapidly because they know that when the price movement slows, the price will likely fall back and return to the resistance trendline.
Support levels from the past may also exist as trendlines, as previously mentioned. Extending this will result in the creation of a trendline, which can provide significant insight to traders regarding what a probable minimum price for a specific security could be.
In this example, let's say that the price of an asset, Coin ABC, which was previously $50, is rapidly declining and an investor wants to know what the item's expected value will be when it reaches that point. The trendline drawn from years of data suggests that a support level of $26 may exist, which means that one may estimate the likelihood of a future decline in the value of a particular asset by looking at data going back six years.
A trendline's validity can also be determined and increased by the number of times the price of a particular asset or security has failed to cross the trendline. Trader's use of a trendline that has shown to be a price barrier in the past is regarded as extremely valuable in the years to come.
The most common trading methods
Let's go back to that "rough" concept from the beginning of the article. Support and resistance levels have made the expression "buy cheap and sell high" a lot easier to apply. Support levels can be linked together to provide a long-term safety net, and in many cases this can be achieved in a straight line.
It's also the same when it comes to determining the average amount of resistance. To buy a security when it is near its support level and to sell it when it is near its resistance level, traders most commonly employ these valuable indications.
Additionally, a stop-loss can be set at a level just below that of the support level in order to stop losses in the event of a reversal in the market's direction. As a result, traders rely on price barriers to help them decide whether to enter a cycle and where to place their initial bets. They're called "entry/exit points," as previously stated.
Trades can also be made from support levels in an ascending trend line. It is possible to get in on the action at a support level and put a stop-loss immediately below the support trendline when the support level is in an upward trajectory.
You can buy a quantity of the coin, say, on Monday and then exit your position on any of the other support levels that the currency has as long as you are following its advancing trendline.
You can use the rule of thumb that the trendline is reliable if the price values have followed it for at least three times. Many times, the price of an asset will go below the set support trendline, but the price usually only goes down for a short time before going back up and continuing to go up.
There are two primary terms that many believe should serve as a starting point for anyone interested in reading and interpreting bitcoin price movements, let alone trading.
These terms were met with varying definitions and examples throughout this text to help the reader better comprehend them.
One can understand how crucial support and resistance levels are to the overall functioning of traders as they employ these useful indicators to make trades by pointing out how analysts can use support and resistance levels to build straight or trendlines.
In addition, two of the most frequent approaches were discussed, which would be helpful for those who are just beginning to learn about the concept and are looking for ways to apply it.