Support and resistance level is one of the most important metrics for crypto traders to determine the right time for buying and selling the assets to seal the most profitable deals.
The support level is the current value of the cryptocurrency from which it is speculated that the price won’t fall below that. This is a situation where there is huge demand and buying activity as traders see this as an excellent opportunity to buy more assets. The support level is also seen as a safe zone for buying purposes. The daily traders use these levels to form a base through which they can calculate the magnitude of highs and lows. The support level is a very dynamic indicator and can change quickly depending on the market conditions. It should always be tracked along with other indicators to have a balanced approach towards trading. The simplest way for a beginner trader is to compare the data from previous highs and lows. This will help the trader to identify the current support levels. Drawing a trendline in the chart can be supportive and illusive at the same time. The trend line will give you an idea of where the price is fluctuating, but it’s harder to predict the future price of assets and other market factors can change the support level. It will also give a fair idea of future support and danger levels.
The resistance level is the current value of cryptocurrency from which it is speculated that the price won’t move above that. This situation is maintained as a large number of traders are selling the assets in short positions. The traders analyze the indicators to see whether the assets will break the resistance and the price will shoot up. The value of the asset can only move if the existing levels are broken and new levels are formed. This exercise also includes emptying the order book of sell orders which might block the asset’s jump to new levels. The simplest way for the beginner to identify the current resistance level is the same as the support level. Here, the trendline should be drawn at the top position to track the highest value. This will help the trader to determine the asset’s current market trend and place the buying & selling order accordingly to seal a profitable deal. If the current resistance level is broken, then it might become the new support level if there’s enough demand to hold the price level.
Types of Support and Resistance Levels
There are multiple types of support and resistance levels. They vary on the basis of how they are formed. Let’s take a look at some of the most important levels.
- Horizontal S&R Levels – This is the most basic level drawn by horizontal lines using at least one price-point.
- Round-Number S&R Levels – These are psychological levels formed around round-number exchange rates.
- Trendline S&R Levels – These are not drawn by horizontal lines, but by upward or downward sloping trendlines using at least two price-points.
- Fibonacci S&R Levels – This is based on Fibonacci ratios that are used to identify the end of a price-correction.
- Dynamic S&R Levels – These levels are updated with each new price-tick.
How to Draw Support and Resistance Lines?
There should be at least one price-point to draw the horizontal support and resistance lines. That particular price-point is normally indicated as the evident swing high or low where the price previously retraced. There should be at least two price-point to draw trendline support and resistance lines. Either connect two swing highs or lows in a price-chart with a trendline and project the same into the future. Both horizontal and trendline S&R lines become more important if the asset price touches them at least three times.
How to Trade Based on Support and Resistance Level?
The basic trading method to use support and resistance is to buy near support in uptrends when prices are going up and sell short near resistance in downtrends when prices are going down. This helps in figuring out the long-term trend which gives a direction to trade-in. For instance, in case of downtrends where a range develops, preference should be given to short-selling at range resistance as going short has a better probability of gaining profit than buying. Incase of uptrends where a triangle pattern develops, preference should be given to buying at near support of the triangle pattern. Buying assets in near support or near resistance can be profitable, but there’s no guarantee that the support and resistance level will hold. So, before placing the order, wait for some time to confirm that the market condition is favoring the existing support and resistance level.