Trading should be a simple process of buying low and selling high, but for many investors, this process is more similar to rocket science. One of the most basic and easy-to-understand strategies that can help achieve this goal is to determine the asset’s support and resistance levels.
Once traders can find support and resistance levels, they can improve the timing of entering and exiting the market. In bullish, bearish and range-bound markets, support and resistance are also helpful.
Let’s take a moment to understand the basics.
What is support?
Support is formed at the level at which the buyer’s demand absorbs the seller’s supply to prevent further price declines. At this level, bullish traders tend to buy because they think the price is attractive enough and may not fall further.
On the other hand, the shorts stopped selling because they believed that the market had fallen enough and might rebound. When both of these situations occur, support is formed.
The picture above is a good example of strong support.Each EOS The price fell to the level of US$2.33, buyers appeared and selling decreased. This causes demand to exceed supply, which leads to a rebound.
Although horizontal supports are considered more reliable, they are not the only way to form support. In an uptrend, the trend line acts as support.
Litecoin (LTC) The bull market will start in December 2020. Since then, prices have rebounded from the trend line many times. This happens because when the price is close to the trend line, the bulls buy, believing that the LTC/USDT pair has reached an attractive buying level.
At the same time, contrarian traders stopped selling, assuming that they might be oversold in the near future. These two situations occurred at the same time, leading to the end of the correction and the resumption of the upward trend.
What is the resistance level?
Resistance can be considered the opposite of support because it is a level where supply exceeds demand and stops rising.
When buyers who buy at a lower level begin to profit, and aggressive short positions begin to short, there will be resistance because they believe that the rally has continued and are ready to pull back. When supply exceeds demand, the upward trend stops and reverses.
Support or resistance does not need to be a single level. The above chart shows how the area between 10,500 USD and 11,000 USD acts as a resistance zone. Whenever the price reaches this area, short-term traders will profit, and aggressive short positions will short the BTC/USDT pair. Between August 2019 and July 2020, the currency pair fell from the resistance zone five times.
Similar to support, resistance lines or areas need not always be horizontal.
During the down period from May 6, 2018 to July 4, 2018, Ether (Ethereum) Bounce back to the resistance line, also called the downtrend line, but start to fall from there. This is because traders with a bearish outlook use the rebound to start new short positions when they expect lower levels.
At the same time, aggressive longs who bought during the sharp decline closed their positions near the resistance line. Therefore, this line is like a wall, and the price falls as a result.
Identify support and resistance during the consolidation phase
When the support and resistance levels are clearly defined in the EOS/USD currency pair above, traders can buy when the support level rebounds and wait for the price to rebound near the resistance level to close the position. The stop loss of the trade can be kept below the support of this range.
On several occasions, professional traders may try to find these stops by pulling the price below range support. Therefore, traders may buy in the process of rising, and wait for the price to decisively close below the support level, and then sell the position.
Trading supports uptrend
When an asset gains support on an uptrend line 3 times, traders may expect that the line will remain unchanged. Therefore, it is possible to establish a long position when rebounding from an uptrend line. The stop loss of the trade can be kept below the trend line.
However, in an uptrend, a break below the trend line does not necessarily mean that the trend has reversed. Many times, the trend is just to take a break before recovering again.
As shown in the figure above, the ETH/USDT currency pair has repeatedly found support on the upward trend line. However, when the currency pair fell below the uptrend line, it did not start a new downtrend. The price consolidated within a range for a few days before resuming its rise.
If the price falls and stays below the uptrend line, traders may close their long positions, but should avoid new short positions. If prices resume their upward trend after consolidation, traders may look for buying opportunities again.
Resistance flip support
When the price breaks through the resistance level, the bulls try to turn the previous resistance level into a support level. If this happens, a new upward trend will begin or resume. If this happens multiple times, it may provide a good buying opportunity.
From August 2019 to July 2020, Bitcoin was stuck in the $10,500 to $11,000 zone. After breaking through the resistance zone, the price fell below $10,500 again, but the bulls actively bought on dips and turned the level into support. Since the new uptrend has just begun, this provides traders with a good buying opportunity.
Support flip resistance
Polkadot (point) The above chart shows how the area between US$28.90 and US$26.50 served as a support zone between February 14 and May 18 this year. However, once the bears pull the price below the support zone, that zone will turn into resistance, and since then the price has not been allowed to break through this zone. This is an example of a support area becoming resistance.
When analyzing any token, traders must look for support and resistance levels because they can serve as good entry and exit opportunities.
In an uptrend, the trader should buy at the support level, and in a downtrend, the trader should go short at the resistance line.
Support and resistance levels are not static, professional traders will try to find stop-loss orders. Therefore, traders should keep stop losses to avoid being overwhelmed by market makers.
The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.