Never let mere speculation or herd mentality fuel your trading strategy. Here is a beginners guide to help you understand what support and resistance zones are and how to find them in a chart.
The narrative around trading and investing in the cryptocurrency
market is negative. Due to its volatility
, the majority consider it to be mere speculation. Contrarily, with institutional adoption and widespread acceptance
, the crypto market is cementing its position as a goldmine. One vital discipline to build wealth in this market is technical analysis
Simply put, technical analysis in the context of cryptocurrency is studying a coin/token’s historical data, gauging the current trends, and predicting its future price. In this discipline, a key tool is to identify support and resistance zones, and to leverage them to build a robust trading strategy.
What Are Support And Resistance In Crypto Trading?
Support and resistance in crypto trading are two elementary concepts concerning technical analysis. At the core, these are the price levels that act as barriers to price movement. They act as indicators of the commencement of reversal trends.
When the price of cryptocurrency drops consistently, support is a price level at which the downtrend is expected to pause. This ‘support’ is created by the influx of buyers looking to buy the currency at a lowered price. The increase in demand manifests itself as a support for the coin.
Conversely, when the price skyrockets
, resistance is created at a price level where currency holders are looking to book profits.
They create a psychological barrier or ceiling to the price of the currency while the perception of its overvaluation blossoms. At this juncture, the market is generally flooded with sell orders and furthered by those looking to enter short positions.
Here, the inference is to use support and resistance in crypto trading as key indicators of the price. But, the fact that they are not the law, but mere concepts evolved out of experience must be recalled at all times.
How To Find Support And Resistance Lines?
Moving onto practically applying the concepts, finding support and resistance in day trading
is a bit of a hassle. Essentially, we are trying to find the price level at which the currency’s price faces correction.
Some indicators that help us with finding support and resistance lines are:
A popular strategy is to fit a trendline across the price chart for a currency within specific time frames. In an ascending triangle formation, a trendline fitted to the high points marks the resistance while another trendline drawn across the low points reflects support.
This is an advanced technique used to find areas of support and resistance using the Fibonacci retracement tool. Using the price history to form a sequence, Fibonacci retracement produces ratios for significant price points that can be leveraged to find support and resistance.
Peaks and Valleys
Analyzing the highs and lows of a currency over a period of time is the crux of this strategy. If a currency’s price reaches similar highs and lows, they indicate strong market sentiments. In this, the frequently observed high and low act as the resistance and support respectively.
A simple strategy that weighs in on the past trends of the currency and produces the average prices for a specified timeframe. Moving averages for different time frames like 10-day or 52-week can be used to find short-term and long-term support and resistance zones.
How To Draw Support And Resistance Lines?
Drawing the support and the resistance lines is a key asset for every crypto trader and/or investor. For this, a quality charting tool like TradingView is needed to get started.
Find Suitable Time Frames
Before drawing the support and resistance lines, clarifying the objectives is vital. For short-term trading, time frames below 6 months suffice to analyze support and resistance. However, for the long-term, loading data points of at least 12 to 18 months are desirable.
Identify Price Zones
In the determined time frames, there shall exist clusters of price hikes and drops which portray high-volume trading activity. Often, these zones are indicators of previous support and resistance levels. Identifying 3 or more such price zones, depending on the time frame, shall provide a fair idea of how the currency has performed.
Drawing Support and Resistance Lines
Connect the identified price zones with a horizontal line. For price zones in an ascending triangle formation, the horizontal line is the resistance. And similarly, for price zones in a descending triangle formation, it shall be the support.
Well-constructed support and resistance lines are a symbol of an authoritative trading strategy in the crypto market. To further the accuracy of the strategy, learning how to use TradingView
is highly recommended.
What Are The Best Support And Resistance Zones Indicators?
Today, there are several automated and customized tools in the market for crypto traders to leverage. Amidst a plethora of options, here are the best support and resistance zones indicators. Each of them is time-tested and fundamentally strong in the market whose prominent feature is its volatility.
Fibonacci Bollinger Bands
This particular indicator
features the popular Bollinger Bands
, a three-line band, plotted for a fixed 20-day period and calculated using the volume-weighted moving average. In line with Fibonacci retracements, this one of the most accurate support and resistance zones indicators in the market.
The pivot point analysis takes into account the three price points (high, low, and closing)
of an asset. When divided by three, the pivot point is reached. This indicator
, upon calculation, provides three support and three resistance levels, giving insights into the range and sentiments of the market.
As mentioned earlier, Fibonacci ratios are a great way to find support and resistance zones. The same is leveraged by this indicator
which plots the fib levels between the high and low of a user-specific time-frame
. Using this on TradingView, Fibonacci lines are traced automatically easing the workload of the trader.
This articulation aims to be a headstart for traders looking to build a robust trading strategy built on the elements of support and resistance. They are trustworthy elements that, when implemented rightly, break all ceilings of money-making in the crypto market.
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