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- 1 Support and resistance are one of the major indicators traders use to strategize their trade.
- 2 In crypto trading as well, these indicators matter a lot. They are widely used by several digital asset investors.
Several factors in technical analysis help traders buy, sell, and make profits. Support and resistance are two fundamental concepts that every trader should know. These are two psychological phenomena that help market participants analyze trends. They also help them prepare for the upcoming situation.
Support and resistance work within crypto markets as well. Besides the assets, everything else remains the same. Therefore, the traders must know about them. So let’s just get into the basics of support and resistance to get better at crypto trading.
Fundamentals of Support & Resistance
Support and resistance both work like thresholds in the market. A support is formed when demand for a certain crypto suddenly crops up after experiencing a downtrend for some time. That happens because the continued low price has got traders interested in buying it, so much so that it starts to support the rise of the price of that crypto.
On the other hand, resistance does the opposite. That happens when the demand for a certain crypto falls after experiencing an uptrend for some time. It occurs because the continued high price has made traders disinterested in it.
The result is a resistance zone where the price starts to come down. To plan the buying/selling according to these indicators, traders need to master them. They must know how to identify and leverage both to make the most of them.
Understanding Support & Resistance in Crypto Trading
Essentially, they are price limits that tell market participants about the future of the crypto. They indicate the start of the reversal trends that traders must know about in order to strategize effectively. For example, when the price of a crypto is dropping for a while, traders can expect support to form.
It’s a reaction to the influx of buyers looking at the asset available at a lower price. On the contrary, when the price is up for some time, the resistance starts to build up. In some time, there are sufficient sell orders. After one point, it’s more than enough. Then, the resistance starts to build and the price slows to begin slumping.
Ways to Support & Resistance Lines
For market participants, it is important to identify the support and resistance lines. To do that, they need to know about some indicators. To begin with, they all try to find the asset’s price correction. Following are some indicators that help traders find support and resistance lines.
Trendline Indicator
To analyze the crypto within certain time frames, traders often set a trendline across the price chart. Especially in an ascending triangle formation, a trendline following high points marks the resistance. On the contrary, a trendline following the low points indicates support.
Fibonacci Numbers
Fibonacci numbers are quite popular among traders across the board. The Fibonacci retracement tool is a particular program that most investors use to identify support and resistance levels. This tool produces ratios for significant price points using price history. Traders can form a sequence with it and leverage support and resistance.
Peaks and Valleys
This method evaluates the highs and lows of the cryptos over a long time. Recognizing and highlighting them, it notifies traders about prevailing market sentiments. It is highly useful in observing frequent highs and lows as support and resistance.
Moving Average
This one focuses on analyzing the past trends of digital assets. While doing that, it produces the average prices for a certain duration. Moving averages could evaluate trends in different time frames such as 14 days or 2 months. It could be used to ascertain support and resistance zones in both the long and short terms.
Methods to Draw Support & Resistance Lines
Drawing the support and resistance lines is essential for traders to discern these two factors. To do this, traders need charting tools like TradingView and the following methods.
Explore Appropriate Time Frames
Before starting to draw the lines, it is vital to determine the time frame. For instance, the short-term traders may go with a duration of 6 months to analyze the support and resistance. The long-term traders, on the other hand, should consider data points of 12 to 18 months.
Spot Price Zones
Within the time frames, traders find diverse ranges of price hikes and drops. Mostly, they show high-volume trading activity and become indicators of support and resistance. If they find 3 such price zones at different times, they get a fair idea of the asset’s performance.
Conclusion
Thankfully, it’s not very hard to learn to use support and resistance. With a little practice and knowledge, traders can master it easily. Once they know about these two major indicators, trading gets more prolific. They are very helpful in highlighting the demand and supply of tokens in the market. Thus, learning about support and resistance is a must for every crypto market participant.
Anurag is working as a fundamental writer for The Coin Republic since 2021. He likes to exercise his curious muscles and research deep into a topic. Though he covers various aspects of the crypto industry, he is quite passionate about the Web3, NFTs, Gaming, and Metaverse, and envisions them as the future of the (digital) economy. A reader & writer at heart, he calls himself an “average guitar player” and a fun footballer.
