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The prominent feature of digital assets, high volatility, has often deterred new entrants from participating in the crypto trading market. However, as more institutional investors and Wall Street giants flock into the market, cryptocurrencies are entering the mainstream, transforming the asset class into an absolute goldmine.
As a result, more folks are now looking for robust trading strategies to help them win more and halt losses. Rather than just letting herd mentality guide their trading, crypto investors depend on technical analysis. This approach helps crypto enthusiasts make more prudent decisions. Also, it pushes them to study historical data and analyze recent trends. In the end, they should be able to predict future prices.
One critical tool that every crypto trader should have is a deep understanding of market support and resistance. Here is a study of these elements. It should help traders looking to break all ceilings to make a profit in the digital assets market.
What Causes Support and Resistance?
Resistance and support are fundamental aspects of technical analysis. They enable a trader to assess the supply and demand of cryptocurrencies. The tools can also help investors read the market sentiment at any given period. These two levels come from the interaction between the bulls (buyers) and sellers (bears). Also, they mark the point at which an uptrend or downtrend reverses.
Support, represented by horizontal or angled lines, is a level where the price of a cryptocurrency starts to recover after a period of decline. At this point, buyers form a barrier that stops any further downtrend by aggressively buying the dip.
This increased demand is high enough to absorb the supply from sellers, as more investors feel the price has dropped enough and is about to bounce. Sellers are also less willing to offload their coins in anticipation of a renewed rally. The result of increased demand and less selling pressure manifests in support for the cryptocurrency.
On the other hand, a coin has reached resistance when its price uptick runs out of steam. At this juncture, holders who accumulated the coin at a lower price and fuelled the rally start looking to book profits. At the same time, new buyers are less inclined to buy the asset because they feel it is overpriced.
Resistance, also represented by horizontal or angled lines, is created when demand from bulls dwindles and the uptrend stalls. Aggressive bears contribute to the resistance by flooding the market with short orders as they look to offload coins. Selling pressure thus increases because most market participants believe the rally is extended and ripe for a retracement.
Leveraging Resistance and Support in Crypto Trading
Support and resistance are invaluable tools in crypto trading because they provide the most basic and easy-to-understand strategies for traders to buy low and sell high.
Both support and resistance act as key indicators of the price of a cryptocurrency. Therefore, day traders often use them to predict future prices and build a robust strategy. Market participants typically trade a cryptocurrency above the support and below the resistance.
Due to the wild price swings experienced in crypto trading, using a combination of resistance/support zones and lines makes sense. For market participants looking to trade long-term, zones come in handy. Meanwhile, exact lines suit best short-term traders.
How Crucial is the Timing?
Time frames of up to six months are best for narrow trading ranges. Meanwhile, analyzing data points for at least a year suffices for the long term. Investors examine how a particular crypto has performed by looking at price hikes and slumps over a particular period. This approach allows them to identify prize zones. These are indicators of previous resistance and support levels.
By plotting support and resistance zones using previous lows and highs, traders can have a clear idea of how an asset may perform. The analysis can also help traders deduce whether a strong trend is about to take hold. Also, it helps them understand whether a price range is emerging. A break from sideways trading means either the bulls or bears may take control over a coin’s price action.
Using technical analysis to determine whether an uptrend or downtrend has reversed is not enough. A trader must also wait until the support or resistance confirms. There is no guarantee that a specific support/resistance will hold. Support could break if bearish sentiment augments. Also, resistance could flip into support if demand mounts and the mood of buyers turns bullish.
Using Automated Support and Resistance Zone Indicators
It is daunting for the average market participant to accurately construct resistance and support lines that can enhance their profits. Luckily, analysts and market experts have come up with time-tested automated tools. This way, they help everyone quickly identify resistance and support.
One of the best indicators to help traders develop an authoritative trading strategy is the powerful Bollinger Bands.
Traders widely use the popular indicator to gain insights on when a particular crypto asset could rocket higher. Also, they can predict whether a coin will consolidate or start a correction. It consists of a three-line band, with the middle band using a simple moving average for a fixed 20 days. The outer bands are calculated at two standard deviations above and below the middle line.
Another tool that can help users easily find support and resistance zones is the pivot point analysis. This indicator considers a digital asset’s high, low, and closing price points. Next, it divides the figures by three to reach the pivot point. The analysis is so popular because it provides three resistances and supports. Therefore, it gives users insight into the market sentiment and price range.
Both these tools can help investors spot price lows/peaks. Also, it helps them jump on opportunities for buying during sharp corrections. Lastly, it makes them understand how to short their position when rallies are exhausted.
Accurately identifying resistance and support is essential. Ultimately, it can distinguish between devastating losses and a winning trade in the crypto market. An examination of these two levels is critical. That’s because it can offer day traders insights on when to enter or exit a position.
As a general rule, investors should look to buy at support levels during an uptrend. Alternatively, they should sell at the resistance line during a downtrend. Support and resistance are vital tools for those looking to build wealth in the highly unpredictable crypto market. The technical analysis can be beneficial in bullish and bearish cycles, as well as during range-bound markets.