Support and resistance are line indicators used in technical analysis to help crypto traders identify trading opportunities. Applied to a trading chart, support and resistance levels create a trading zone that marks where a crypto asset price tends to bottom out (buy signal) and when it tends to top out (sell signal).
Quick Summary - Trading with Support & Resistance
- Traders and investors use support & resistance lines in TA to identify price trend continuations and reversals
- Support is a price level where a downward trend tends to bottom out (buy signal)
- Resistance is a price level where an uptrend tends to top out (sell signal)
- Trendlines, moving averages, and Fibonacci Retracement are ways to analyze lines of support & resistance.
What is Support and Resistance?
Support and resistance are used in technical analysis to help crypto traders spot and take action on potential trend reversals or continuations.
Support is drawn as a trend line that follows price lows that occur right before a reversal has happened, signaling a buy signal due to concentration of demand for the crypto asset. Also referred to as the “floor”.
Resistance is the opposite of support. A trend line is drawn to show historical price highs that were followed by a downtrend, indicating a sell signal due to a concentration of supply. Also referred to as the “ceiling”.
The longer period of time that support or resistance levels have been tested, the more importance these price levels will have.
How to Find Support & Resistance Levels
Crypto traders have multiple ways to identify support and resistance levels, including using static trendlines, dynamic moving averages, or Fibonacci Retracement.
Using trendlines (static lines)
Trendlines can be applied in a horizontal way (“static”) to a chart to find barriers to resistance and support.
- Traders plot trend lines on a static chart to spot price levels where an asset’s price cannot continue downward (support) or cannot continue upward (resistance).
- Static support and resistance trend lines are not moving and are horizontally drawn on the candlestick chart as shown below.
Using Moving Averages (dynamic lines)
A moving average like the 20-day MA helps you identify dynamic (or moving) support and resistance trend lines.
- Crypto asset prices find support at the moving average during an upward trend
- The moving average identifies resistance levels during a downward trend.
Using Fib Retracement?
Fibonacci Retracement uses a mathematical model to detect further price support or resistance levels by analyzing areas of pull backs (“retracement”) of a price trend. Traders can chart a high and low price point and the Fib retracement indicators create support and resistance levels between these points.
Each level has an associated percentage indicating the level of retracement: 23.6%, 38.2% 61.8% and 78.6% are most commonly used.
Trading with Support & Resistance - How it Works
There are two main ways to trade using support and resistance:
- Buy/long near support levels in uptrends.
- Sell/short near resistance levels in downtrends.
In order to set up buys and sells according to support and resistance levels, once you recognize an emerging pattern, analyze the following:
Previous price moves - Check for the asset’s price to fall in line with a previous area of support or resistance. When preceded by a steep drop or spike in price, support and resistance zones are more significant.
Number of touches - The more times a price has tested a support or resistance area, the more significant that price level becomes. Repeated bounces attract the notice of other traders who will begin making trading decisions based on those movements.
Volume & timing - The strength of the support or resistance level depends on how much buying or selling has taken place at a certain price level. Traders often will trade repeatedly around the same price levels. If strong activity and high volume is followed by a price drop, selling will likely occur, returning the price back to that level.
By identifying and analyzing support and resistance levels, traders often spot chart patterns and use them as insights into potential outcomes.
Trading Support and Resistance in a Sideways Market
It’s easy to spot support and resistance lines in a sideways market because the tops and bottoms are generally better defined. That means the asset price has traded within a relatively stable range without distinct trends for a period of time.
Quadency’s Grid Trader can help traders make the most of support and resistance levels:
- Traders place multiple buy and sell limit orders around the grid lines between a defined price range, such as support and resistance levels.
- As the asset price fluctuates within the grid, profit can potentially be realized from each buy low/sell high cycle.
- While over time this can mean more profits, price breakouts may limit the range trading strategy.
No one can say for sure what a crypto’s price will be tomorrow. But by knowing how to determine and analyze support and resistance levels, traders can use these historical indicators to gain insight into when a price might bounce or be supported.
- Analyze Support & Resistance Levels with Quadency’s Slick Charting Tools
- Beginner’s Guide to Fundamental Analysis
- Discover QUAD tokens and start staking!
Quadency is a cryptocurrency portfolio management platform that aggregates digital asset exchanges into one easy-to-use interface for traders and investors of all skill levels. Users access simplified automated bot strategies and a 360 portfolio view with a free account.
Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.