Cryptocurrencies such as Ethereum, Bitcoin, Ripple, Litecoin, NEO, IOTA, and the likes can be traded on a secure cryptocurrency exchange platform or bi-directionally on regulated forex brokers as CFDs. This implies that you can gain from rising or falling prices by buying (going long) or selling (going short). The identification of support and resistance levels on the charts is a crucial key to the execution of successful buy and sell orders.
The cryptocurrency market is a highly volatile one. That implies there is a vast difference between the highest and lowest prices for any trading day; a lot more than most currency pairs you will find in the forex market. This has benefits and drawbacks. If entries and exits are well placed and managed, it is possible to get excellent returns, but if entries are not correctly timed, or are placed too far away from the critical levels of support and resistance, it is also possible to get terrible outcomes.Understanding basic concepts of technical and fundamental analysis is of uppermost importance in order to succeed in the filed. One of the basic and most frequently searched notions in technical analysis is the concept of support and resistance. But what are bitcoin support and resistance?
A level of support is a price level which an asset finds hard to go below is referred to as support level. This area forms a support for the price of an asset as a result of the difficulty encountered by the asset in going below that price level. This is probably the best strategy for bitcoin trading, as it is the best place to enter long on any asset. The picture below shows support level for Bitcoin.
You can see that the lowest ends of the highlighted candles did not go below the area defined by the purple line. This is the support level for bitcoin at that particular period.
An area where the price of an asset finds it difficult to go above is referred to as resistance level. Therefore, this price level is said to be “resisting” the asset from moving further upward.
The model of a resistance level is shown in the snapshot below. You can see the highest ends of the candles in focus did not go beyond the area demarcated by the purple line. Currently, in the cryptocurrency market, this is one of the bitcoin trading strategies to consider.
Setting Resistance and Support Levels
How do you recognize resistance support? Bear in mind that the mindset and actions of the sellers and buyers in these areas are what reinforces them. So, using the previous reaction highs or lows, you can identify these essential areas.
Method 1: Using Previous Horizontal Key Price Levels
– Supposed the hourly chart below represents the Bitcoin/USD pair:
– The areas of support are represented with the lines number 1 and 2 and areas of resistance 3 and 4 respectively. The resistance levels denote points where the selling pressure on the asset pairing softens buying pressure. Therefore, the market players are more interested in selling. On the other hand, areas of support indicate price points where selling pressure starts to ease and where the market is likely to face a reversal.
With that in mind, a buy position can be considered on reaching points 1 and 2 while sell position can be opened on points 3 and 4. To further enhance the accuracy of prediction, support and resistance lines can be supplemented with other indicators like Bollinger Bands or RSI.
Trendlines are helpful in recognizing support and resistance in the events of trending prices, as they are usually diagonal in orientation.
Using the Fibonacci Tools
Depending on where the original trend is heading, the Fibonacci retracement tool can be used to determine price areas that could be used as resistance or support. The picture below portrays a retracement of a a downtrend, so the levels can only be used to recognize resistance for long re-entry trades.
After identifying any potential areas of resistance and support, they must be verified before they can be applied for trade entries or exits.
How to Validate Support/Resistance Levels
– Reversals can happen on a sustained breakout of key support and resistance levels. A support can turn into resistance and vice versa.
– Continuous retests of critical support or resistance levels further strengthen them, making a sustained breakout less likely to happen in the short-term perspective.
– When the level of support and resistance level gets broken, the strength of the subsequent move is directly correlated to the strength of the level broken.
– Take only recent history into consideration when looking for support and resistance.
One of two things can happen when the price action of a currency pair nears the resistance and support points:
- The candlesticks will move closer to the key levels and may even break the resistance or support level, but then may go back and close below the resistance or above the support. In this instance, the price action has “tested” the key levels.
- The candlesticks will violate the support/resistance lines and close below/above the key levels sequentially. In this instance, the key levels are said to have been “breached.” This circumstance may happen after repeated testing of the key levels or may happen straightaway if the momentum is strong enough.
Levels of support and resistance indicate key levels at which trade exits and entries can be made. If a trader buys the digital currency, the exit should accurately be set at the closest resistance point. On the other hand, if the trader sells the digital currency, the exit point may be set close to the nearest level of support.