Support and resistance zones offer basic understanding on how to setup a trade

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Bitcoin and Crypto Technical Analysis Friday, November 19, 2021 - 19:05

In the previous edition, we briefly touched on the introduction of technical analysis (TA) - we encourage you to read it to understand the role of TA in the cryptocurrency universe. Do remember that, as an investor, you should not be too worried about TA or shorter timeframes. They are more relevant to traders who frequently trade to book higher profits, though with higher risks.

The zones - an introduction

In today’s edition, we will look at a simple yet powerful set of indicators - support and resistance zones.

Support and resistance zones are basically regions on the chart where the price trend of an asset might possibly reverse because of strong buying or selling pressure. This allows traders to exploit these regions to make money. Now, let's see how they work.

Resistance - sell signal

Resistance zone is usually where the upward moving asset encounters a change in direction and reverses its immediate direction due to selling pressure. Many traders use this strategy to sell at this zone and that’s why the price of an asset struggles to break and go beyond this zone. So it is always advisable to take profits just before price hits the resistance zone.

Dogecoin Chart

Source: Tradingview, Binance

Support - buy signal

Support zone is usually where price tends to bounce back because of buying pressure. In most scenarios, price gets rejected at the resistance zone and is anticipated to approach the next support zone. So buying an asset at support and selling at resistance level is a simple and easy approach to trading. To summarise, the support zone is the best buy signal one can have.

Dogecoin chart

Source: Tradingview, Binance

However, one needs to keep in mind that if the support breaks, then price is likely to decline further to the next support zone. This is why it is important to have a stop loss. Stop losses, as the name suggests, are used to stop trades from making huge losses. It is an advance order that can be placed to sell an asset once it reaches a certain price. Let's suppose a trader purchased some Dogecoin (DOGE) at INR 20 INR and placed a stop loss order at INR17. If the price of DOGE falls below INR17, DOGE will be sold immediately at the prevailing market price.

Recognizing these zones

Resistance and support zones are essentially key levels from the past - a previous all-time-high of the asset is invariably a resistance zone (given that traders will definitely be profitable if they sell at that price). Similarly, a low from previous rallies will represent support (given that traders who missed out on that price previously will buy now).

There is a simple visual exercise that one can perform to find the support and resistance zones. Look for a series of points where price tries to reach but fail to go beyond that point. That’s your resistance zone. Similarly, look for points where price falls to a particular level but bounces back repeatedly. That’s your support zone. Now draw parallel lines containing those points and you have zones corresponding to support and resistance.

The next question to figure out is on which time frame should one carry out this exercise. Time frame means the time intervals between which the prices of an asset is recorded. For example, “daily” time frame on a chart shows prices at the end of 24 hours. Similarly, there are time frames consisting of 4 hours, 1 hour, 30 minutes and so on. It is generally advisable to start your TA analysis with daily time frame charts.

Breakouts and Breakdowns

When a certain zone fails, we get a breakdown or breakout depending on the direction of the price it is trending towards. Like mentioned above, traders tend to place sell orders at resistance. But sometimes, due to external circumstances like increased interest in the asset or major developments upgrades, the demand for the asset soars and sell orders get filled fast, pushing the price higher and leading to a breakout from the resistance zone.

Similarly, traders tend to place buy orders at support and at the same time, some would have placed stop losses just below the support zone. So, if there’s too much selling pressure at support, traders will be stopped out causing more selling.

To sum it up, we saw how support and resistance zones help in identifying entry (buy) and exit (sell) positions. There are many more indicators in TA that help traders navigate the market, we will look at those in future articles.

Disclaimer: This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.

 

 

 

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