This article Cryptocurrency Trading Basics: Support and Resistance is the first part in a multi-part series on technical analysis for cryptocurrencies.
Although Cryptocurrencies are a new market that is highly volatile and new, using technical analysis can be a good way to gauge price action and by extension, help you make better decisions when trading the market.
In this series, we will look at the two most commonly used technical indicators; they are easy to learn, and anyone can understand it. These are the support and resistance levels.
The support level refers to a price level that the asset does not fall below. Buyers of the asset tend to start buying the stock at the support level or above it.
So for example, the chart shows a bounce in the price of an asset everytime it falls to $50. This means that at $50, many buyers feel that is an attractive price to buy the asset, and so set their limit orders at that price to enter as soon as the asset hits that price.
This figure is an example of Bitcoin.
In the past few months, Bitcoin has fallen tremendously from it’s high of $20,000 in December. Having fallen all the way, it was hit $6,000 and experienced a bounce twice. This means that many buyers view Bitcoin as a great buy at $6,000. And hence, it is likely a strong support level.
What this means for you is that you can consider purchasing or placing an order to buy Bitcoin at that level – as it will unlikely (but not impossible) fall below that level, and if it goes up, you’re likely going to make a profit quickly.
Resistance levels work opposite to the support level. A resistance level is where most people feel that it is a good price to sell, so many sellers will set their limit orders on that particular price to get rid of their assets at that price.
So for example, there is a reversal of price downwards every time an asset hits, say, $80. It looks like a ceiling on a chart like there is some invisible resistance that causes the asset to ‘bounce’ everytime it hits $80. Hence, you can conclude that the resistance level of this particular asset is $80.
Let’s look at the Bitcoin chart again:
Here, in the one month chart, you can see strong resistance at around $8,300. It crossed this level for a while, but pretty much stayed stagnant at that level for a period before falling back down again. This means that there are many people who want to sell at that level.
So for yourself, it is a good consideration to sell your Bitcoin at this level too, if you are trading.
If you were to buy Bitcoin at $6,000 and sell it for $8,000, you’re already looking at a profit of 25%!
However, of course, hindsight is always 20/20. Often we can’t see the resistance or support levels until they have been formed. That is true, partly.
If you stretch the graph back a longer period, you should be able to see periods by which there is support at certain levels. This is a long-term support or resistance levels, and they are likely ‘stronger’ than the shorter term ones. This means that there might be bigger buyers and sellers at these prices.
The support and resistance levels are the most basic of the technical analysis. However, for great trading, it helps that you can be equipped with other tools as well to understand how the market might behave.
Nonetheless, this fundamental understanding of support and resistance levels is crucial in your trading journey. You don’t want to, in a sense, go against the grain when it comes to this.
How have you used Support and Resistance in your trading journey? Share your comments in the COMMENT section below.
You might also like
More from How do I start trading?
This article 'Trading Basics: Understanding Cryptocurrency Pairs' will help the reader understand the unique way of valuing altcoins in the …