- 1. Introduction
- 2. The Support Area
- 3. The Resistance Area
- 4. Practical Uses of Support and Resistance
- 5. Support and Resistance Flip
- 6. Psychology of Support and Resistance
- 7. Chart Patterns as Support and Resistance
- 8. Moving Average Support and Resistance
- 9. Fibonacci Retracement Tool for Support and Resistance
- 10. Confluence or Eclectic Approach
- 11. Conclusion
Introduction
When you decide to invest in the cryptocurrencies, you resort to either technical analysis or fundamental analysis to devise a trading strategy. In technical analysis, you study charts and try to find out the traders’ psychology: where they are buying and selling and where the demand and supply zones are. Also, you are required to keep in mind that support and resistance do not exist merely along the simple trend lines. They are also extracted through studying moving average and Fibonacci Extensions.
The Support Area
The idea of support and resistance in the crypto market is as important as in any other market. The support area refers to the levels where the price falls more than once but rebounds. This is because the buyers take control at the support level. Buyers try to dump the market but fail. The support levels are demand zones that become the floor of the pricing action of a coin. However, if the support levels are tested again and again, likelihood increases that the level will be breached, and price will fall because repeated retests weaken the support.
The Resistance Area
Similarly, the resistance area is where price climbs repeatedly but falls immediately. It happens because buyers try to pump the price, but sellers take control on a level that we call resistance. The resistance levels are supply zones that start acting as a ceiling for the PA of a coin. Just like the support level, resistance levels also weaken if retested multiple times.
Moreover, it is wiser to think of support and Resistance as areas or ranges rather than levels because cryptocurrency market does not follow any physical laws that might pull or push the price systematically. At any time, a piece of news or an unforeseen event may nullify the whole technical analysis.
Practical Uses of Support and Resistance
As a trader, you can use the support and resistance levels to take entries, exit, and put SL or TP orders. You can expect price reversal or sideways movement at these levels. A successful breakout or breakdown followed by a retest or two confirms the PA reversal.
Caution must be exercised in following these zones. It is not only you who know about the support and resistance areas. Being there on the chart, it’s public information. Everyone will use these regions, bringing increased liquidity when the price reaches there. Whales may use you as their exit liquidity.
So, what exactly should the strategy be? It is best to think of the support and resistance areas as triggers for invalidation of your trades. In other words, your trade is likely to hit SL or TP around these regions. Therefore, take entries as far from these areas as possible.
Support and Resistance Flip
When a coin has broken out or down, resistance and support areas may flip roles. During a pump, a resistance area may turn into a support. On the other hand, a downtrend will change the role of a support area into resistance. It is not uncommon for a cryptocurrency to retest the broken area, so newly formed resistance or support is generally considered a good area for taking a short or long position.
Psychology of Support and Resistance
As is already mentioned, the knowledge of support and resistance is shared by everyone who is active in the market. As a result, minor adjustments are made by a majority of traders. These adjustments are a direct result of the human mind’s inclination to simplify the otherwise complicated things around us. Instead of saying that Polkadot is facing resistance in the area of 4.553, we feel it easier to consider 4.55 as our area of interest. So, we feel inclined to set a TP order just below the area of that psychological mark. Most of the TP orders will be placed at 4.548 or 4.549 on the basis of a supposition that the price may not precisely touch the psychological 4.55 resistance area.
You should act according to this supposition to stay safe because if your TP is exactly at 4.55, and if the coin retraces from just below this point, you will miss the profit and round-trip to the entry point, or even you can go in loss later on. This approach is called “frontrunning” as it involves being pro-active, taking actions on anticipated knowledge rather than getting active when something has already happened.
In addition to simply drawing straight trendlines, you should also learn how to study support and resistance from other methods.
Chart Patterns as Support and Resistance
Ascending and descending triangles, ascending and descending wedges, head and shoulders and inverse head and shoulder patterns and bullish and bearish flags can act as indicators of downtrend or uptrend. The key is to identify the pattern before it is developed fully.
Moving Average Support and Resistance
On any chart you can set the indicators of moving average – both simple and exponential. Although you can fully customize this indicator, 7, 20, 50, and 100 bars moving average is commonly used at different time frames. The choice of time frame depends on your trading strategy. Lower time frames are better for scalping and day trading whereas higher time frames are more suitable for trend trading and spot trading.
Fibonacci Retracement Tool for Support and Resistance
Fibonacci Retracement Tool is an advanced way to find out support and resistance levels. But this indicator is not generally available on exchanges. You need to resort to TradingView for this purpose and draw a tool precisely enough to get a clear picture. The tool provides you levels from 0 to 100%. Typical Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%.
Confluence or Eclectic Approach
Records show that a support or resistance area confirmed by a higher number of indicators is always better than the one presented by only one or two indicators. This concept is called confluence.
Conclusion
Summarily, support and resistance areas are very important for any trader. Support is the demand zone where a coin finds a floor and the resistance is the supply zone where the price action finds a ceiling. Many indicators are used to confirm the support and resistance levels and the more indicators you use the more reliable your results are.
