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Technical analysis is a much-needed tool for a crypto investor looking to venture and invest in the crypto market. The market is driven by trends, and technical analysis helps us identify those trends and determine a trading strategy accordingly. Building on previous editions, where we try to learn new technical analysis basics each week, we bring to the readers two other significant terms - support and resistance levels.
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Support and resistance levels are crucial for any trader looking to enter or exit a market. In crypto asset, too, support and resistance levels play equally important roles. Each represents two respective levels on a price chart that appear to be limiting the market movement within a particular range.
While a support level is a level where the price regularly falls, stops, and bounces back, a resistance level is where the price regularly rises, stops, and then retreats. These levels are the result of the demand and supply forces acting in the market, and If there are more buyers than sellers, prices will rise. If sellers overtake buyers, the prices fall.
Support and resistance levels may be horizontal lines (like the ones depicted in the price chart above) and a few additional others. Let’s discuss those:
These levels are round numbers. Human psychology is more receptive to round number price levels, and normally, too, we see a large number of pending buy and sell orders at these numbers placed by traders in the markets. For instance, now that Bitcoin is trading at $18,760, its psychological support can be $18k, and psychological resistance can be $20k.
The Fibonacci tool is a useful identifier of price reversals when market corrections take place. Therefore, Fib or Fibonacci levels can act as support and resistance levels for a crypto asset.
We already discussed this in our previous lesson, but let’s have a quick revision here. Trendlines are lines that are formed by joining two or more green/red candles. A trendline may be ascending or descending. When a trendline joins two or more lows, it is the trendline support for that crypto. Similarly, when a trendline joins two or more highs, it can be called the trendline resistance for that crypto.
Technical indicators can also be a good parameter to make spot resistance and support levels in the price chart. Technical indicators like the 200-day moving average are considered important support and resistance lines. Pivot points are also used as pivot support and resistance levels.
While doing technical analysis for a particular crypto asset, we often look at whether the price is breaking above a resistance level or falling below a support level to determine where the price will move in the coming days. If the price breaks below or above a level continuously, we witness a new trend forming, which gives rise to new support and resistance levels.
Disclaimer: This article was authored by Giottus Crypto 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.