Support and Resistance Levels in Cryptocurrency Trading
In this guide, I will not only teach you what resistance and support are, but I will also make sure you understand how to identify these key levels on a chart.
Many top financial traders have lauded Support and Resistance trading, and many more will be joining that train. This is simply because this almost ancient method of trading the financial market works for those who have mastered it.
Funny enough, trading support and resistance are relatively easy.
Although trading decisions can be made based on Support and Resistance levels, it is better to combine these levels with your tested trading systems. So, in order words, learning how to identify the perfect Support and Resistance levels will also improve your current trading system. Meanwhile, any serious trader will advise you to learn how to identify these levels before even learning anything else.
This is why this guide was created.
What Are Resistance Levels?
For those who think Resistance is just some random zone where price makes a turn, you have never been so wrong.
Resistance levels are not formed randomly; these levels are formed based on demand and supply.
Resistance levels are formed by collective sellers making a trade at a particular point in time. Their collective sell trades leads to a market turn around. This sharp turn around point is what then forms the resistance level. The potential sellers tend to remember the level they sold previously, so if the price returns to that level, they are likely to sell again. Another set of traders who helps develop a resistance level is failed buyers. These traders initially made buy trades at a support level but were unlucky: as the price didn't go higher. These buyers will then have to close their buy trade using a sell order, just before the price hits a preexisting resistance turn around point.
Traders who made buy trades close to a resistance point and are now trapped when price acknowledges the resistance level is another group that strengthens a resistance level. To make up for their loss, these groups of traders need to enter sell orders.
Working together, all these groups of trades send price south. This works based on the principle of demand and supply for those who are yet to learn how supply and demand affect the financial market.
This is a simple formula: once there is more supply than demand for a coin, the price of such coin falls when the demand is more than the supply of coin, the price of such crypto-assets falls.
On the above chart, you will see that the resistance levels have been labeled in orange. In the case of an uptrend, traders are expected to buy at the support levels marked as green and then profit at the resistance levels. Entering and exiting the market at these important levels will help improve risk to reward ratio.
What Are Support Levels?
Support levels are price level, where the market bounce upwards. Traders at these levels are the ones making collective buy trades. The effect of these collective buy trades pushes the market up. The buy trades lead to high demand for the cryptocurrency. Therefore the price goes up. At these points, there is always an increased volume. If the demand keeps increasing, the price will continue to go up until sellers enter the market and start selling.
In a case whereby a previous support level fails to hold, then the seller must have thrown caution to the wind and are ready to keep selling.
How to Draw Support and Resistance Lines on a Chart?
Drawing the Support and Resistance lines on a chart can be confusing when several turning points are on the chart. As a rule, only draw a new support line when the previous highest or lowest point has been broken. This way, you won't be drawing mini and insignificant levels.
To start with:
Look for the previous point back in time, where the price has turned down in an uptrend. This point should be above the current price of cryptocurrency. Make sure this is the highest and the closest to the current price as possible. For support, look for the previous point back in time, where the price has turned to the upwards. This point should be below the current price. Make sure this is the lowest and the closest to the current price as possible. If you can't find such a point on your current chart, you need to check on a higher time frame.
At the levels you have marked, make sure you check how the price reacted at these points. Was it a sharp turn, or did the price take its time before making the turn? All these will help determine when and where you will be entering or exiting the crypto market. Another thing to take into consideration is the volume at these points. The higher the volume, the higher the chances of such an area holding up.
Only focus on the major turns and leave the small waves out of your calculations. However, if you are dealing with a weekly or monthly chart, it is best to consider every level. Just don't overdo it.
How To Trade With The Support And Resistance Indicators?
To keep it short and straightforward, you should never make cryptocurrency trading decisions based on support and resistance levels alone. These levels should be integrated into your existing trading system. It will help you know where to place your take profit and stop loss, and how much risk you can expose your account to. Having a sell signal at a resistance level further validates the signal. The same goes for a buy signal at a support level. So even if you are using a simple strategy such as EMA 5/10 cross, combining the system with support and resistance will improve your entry and exists significantly.
For those who still want to go ahead to trade these levels alone.
Just make a sell trade when the market touches resistance and a buy trade when a support level gets hit.