Cryptocurrency Trading doesn’t mean that it is going to be as simple as exchanging apples for a stick. It comes with its own set of terminologies which are important to know for traders if they are willing to stay in it for the long run. In this article we are going to focus on the phenomenon of support and resistance levels and how traders can use them to make better trades.
In order to maximize readability and understanding of knowledge in a simple and organized manner, we will be dealing with discussing support and resistance levels and their applications in the following manner:
- What are support levels?
- What are resistance levels?
- How do Support and Resistance Levels exist in the market?
- Common strategies traders use
When most people hear the phrase ‘Cryptocurrency Trading’, there are a few things they are bound to think about. Many would easily relate the term Bitcoin or Ethereum with it and a somewhat larger proportion would be able to give a very very rough idea of how it’s supposed to go about; buy low, sell high.
That is the advantage of using in your terminology, a word everyone is familiar with. The word ‘trading’ in Cryptocurrency Trading tells us that it is going to be lying on the principle of buying a particular asset when it is cheap, and selling it when it is high in value.
However, as you dive deep into the very rough idea of what we have just described, you have to get familiar with industry-specific terminology. While the pros and cons of the terminology game itself is something more suited for a literature centric article, we are more focused on dealing with what the two terms; support levels and resistance levels mean and how they help traders.
What are support levels?
Let’s start off by defining what Support Levels are. Support is a fancy word for the point at which the price of the security does not further tend to fall and rather remains ‘supported’. It is when the supply from those who are selling a particular security meets the demand from the buyers in the market for that particular security.
In order to further elaborate, support levels are levels below which the price of a particular security is not expected to fall. They are unique for each security, so in the case of cryptocurrencies, each one will have it’s own support level.
Support Levels exist as when the price of a particular asset decreases, more and more people pay attention and want to buy the particular security at that decreased price. As the security gains good momentum it’s price does not fall anymore and hence it comes to a point where the sellers selling it are met with equal demand from the buyers. This causes there to come a region from where a further price drop is not expected.
Support levels hence signify the area where the minimum price of the security will lie and in doing so, allow traders to decide for themselves if they want to enter the market by buying the particular security at that price or not. Note that traders can buy most securities whenever they want however, it is usually at support levels that many traders want to make a decision as that is the lowest price under which the asset is not expected to fall in value.
Hence, we are now met with another concept of entry and exit points. As the names suggest, an entry point is the point at which the investor or trader enters a position in a particular security. For example, when buying 0.020 BTC at a Price X. An exit point would henceforth be somewhat of the opposite, where the trader exits their position held.
When focusing on support levels, it is important to notice and link that it is usually the support levels one would look to when considering to enter a trade as that is when the assets would be at their minimum value. However, do note that entry points are not purely limited to only being points at which a trader ‘buys’ securities. It can also refer to the investor selling.
Hence a better more suitable definition would be the point at which the investor or trader enters in order to initiate their trading activity. Noting how important the price of an asset which you buy or sell originally is, an entry point is often a heavy factor to consider when trying to predict whether a given trading transaction would be fruitful or not.
What are Resistance Levels?
Resistance Levels are points at which the price of a particular security meets ‘resistance’ in increasing. They are essentially points from whereupon the price of the asset is not expected to increase. They exist due to a large number of people wanting to sell due to that particular security’s prices being high.
In order to further elaborate, resistance levels are reached when a particular security has increased in price so much, selling it at that point seems highly desirable to its owners. For example, having bought an asset X at $0.4 USD, many who bought it are now starting to sell it when it has reached $0.9 USD as they feel like it’s at its highest.
When this happens, we usually see the price of that particular asset not rise from that point. This is because as mentioned before, the price of the security is meeting a ‘resistance’ to climb higher. Hence, resistance levels usually mark the top end of the price swing, from where the price of the security is not expected to rise, but fall.
The Resistance Levels are also used to allow traders to determine good entry and exit points. With regards to resistance levels, as they mark the maximum end of the price value for a particular security, it can allow traders to, for example, initiate a selling position. Moreover, it can also guide others into using the information about where the Resistance Level lies to decide whether it is a good time to buy the particular security or not.
How do Support and Resistance Levels exist in the market?
Now that we are clear with what support and resistance levels are, you may already start to see why they are so important. If one can use past trends to get to know likely positions of where the support and resistance levels are going to lie, it can allow one to know likely maximum and minimum price values for a cryptocurrency asset and hence plan out how they will be moving about trading that particular asset.
Do note however that as mentioned earlier, support and resistance levels are calculated based on past performances of securities. Do understand that they are predicated on the assumption that the factors which influence the market are going to remain relatively constant. Only then can the past data be used to paint a picture as closely as possible to what the current could look like.
Now that we have learned that support could be seen as the ‘minimum’ and the resistance levels can be seen as the ‘maximum’, let’s look at how this is actually perceived in the real cryptocurrency market. After all, theory and practical although may be predicated on the same principles, can look quite different.
Let’s take into consideration the first concept we haven’t yet discussed and it could best be illustrated with an example. Say an imaginary Coin XYZ starts off at $0.1 at a given time and rises to its maximum at $0.41 on Monday. On the very next day, the same coin XYZ rises to a maximum of $0.43 in value. The very following day after that it’s maximum value was $0.42.
The fact that the maximum values can vary slightly while still sticking somewhat close to each other shows that resistance levels aren’t always exact. They may be straight lines on a graph beyond which the price of a security does not climb. However, in most practicality, instead of a resistance level, we find a resistance area. This area is defined as the ‘somewhat’ region beyond which the value is not expected to go in terms of a particular security’s price.
The same occurs for the support level as well. The support level may vary slightly from time to time for generally could be seen as lying around one area.
Now that we have started to step into the realm where support and resistance levels can change their positions, let’s bring in another key phenomenon we see in real markets which are trends.
You see up until now, we have discussed static and relatively static barriers (in the form of resistance zone and likewise for support) which govern how up or down the price for a particular security can go. These would stay in place and remain relatively fixed given the conditions governing the position of support and resistance levels remained the same.
However, indeed there exists a movement of resistance and support levels quite much from their original positions. Welcome to the concept of trendlines.
Notice how sometimes many crypto enthusiasts like to compare the price of Bitcoin from 2008 to now? From just a few fractions of a dollar to now one being valued in tens of thousands at the time of writing this. Now obviously, in 2008, BTC did not at all have a resistance level of $40,000 USD indicating its price could go up there one day. Instead, with time, its price increased. And with its price, so did its price barriers of support and resistance levels.
A gradual increase like this, in both the support and resistance levels can be used to draw up trendlines. How they are important to trading will become clear in the next few lines as you will soon come to realize they are very useful tools for traders to determine the price value of a particular security.
In most cases, the support levels and the resistance levels can be seen to rise or fall in a trend. Analysts can construct lines connecting all the support levels or the resistance levels, creating a somewhat straight trajectory which can help predict the support or resistance levels of tomorrow. This will allow many traders to have more data at hand and make their trades more confidently.
A good practical example to point to here is how when a market generally trends, many securities within rise exponentially in value. This could go well beyond the predicted resistance level and it usually does so due to factors that govern the price of the security itself. A good point to note here again is how resistance and support levels, although are very useful indicators, don’t set in stone the maximum and minimum price of an asset.
Coming back to the example however. As the price of a security rises exponentially, trading experts usually eye for the resistance trendline keeping in mind that as soon as the price action slows, the price of the security is very likely to fall back from its exponentially high value and return to the resistance trendline.
As mentioned earlier, these trendlines can also exist joining support levels of the past. Extending this will create a trendline which can allow traders useful insight into what a potential minimum price for a particular security can be.
Say the price of a particular asset, Coin ABC which was previously at $50 is falling rapidly and an investor wants to calculate the likely value to which it will fall. Looking at data from the last 6 years may indicate how there may exist a support trendline around at $26 and hence, one may be able to calculate the likely potential dip in a certain asset’s value, from the trendline formed from years of data.
It is also to be noted that the validity of a support or a resistance trendline is determined and increased on the basis of how many times the price value of a particular asset or security has been unable to cross it. If the trendline(s) has been relatively valid in proving to be a price barrier, that very trendline is considered a very useful tool for traders to use for years to come.
Common strategies traders use
Let’s recall the very “rough” idea mentioned in the very beginning of this article. The phrase “buy low, sell high” is even easier to implement now that you know what support and resistance levels are. As mentioned earlier, support levels could be joined together for a security across time and in many cases can result in a perfect straight line.
This is also the same for a measure of the average resistance level. The most common method in which a trader utilizes these useful indicators is when a trader buys a particular security when it is near its support level, and sells it off when it is near its resistance level.
One could also set their ‘stop-loss’, which is a value at which special softwares usually finishes a held position in order to stop losses, at a value just below the support level. Therefore traders use the price barriers to determine whether it is a good time to enter the cycle or not, and also to determine where to start their position from. These, as discussed, are known as entry/exit points.
Another strategy many traders use is to trade from the support levels which are found to be in an increasing trendline. When one realizes that the support level of a security is in the upward trajectory, they can start their position on one support level and can set a stop-loss at a value just below the support trendline.
So say a coin XYZ has its support levels increasing gradually everyday, one can buy an amount of XYZ on a Monday from the support level and can end their position on one of the other days’ support levels given they are following the increasing trendline.
A good thumb rule to remember is to start trusting the trendline after it has been followed by the price values for more than 3 or so times. At many instances, the price of a particular asset may even go below the set support trendline, but it is so much the case that the price only dips before rising again and continuing with an increasing trajectory.
This article intended to explore the two main terminologies that many believe should be the starting stone to anybody starting out to read and interpret price changes in the cryptocurrency industry, let alone trading.
The two terminologies being Support Levels and Resistance Levels were met with definitions that evolved over the course of this article with relevant hypothetical examples in order to solidify an understanding in the minds of the reader.
By also establishing the point of how support and resistance levels could be used to draw straight or trendlines by analysts, one could see how important support and resistance levels are to the overall functioning of traders as they use these useful indicators to make trades.
Two most common strategies were also shared which would be deemed as quite helpful for beginners starting out with the concept and trying to see it’s applications.
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