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Roles of Support and Resistance Levels in Cryptocurrency Trading and Investing

Roles of Support and Resistance Levels in Cryptocurrency Trading and Investing, FP Markets

Reading Time: 8 Minutes

The rise in popularity of cryptocurrencies remains evident and has led to an increase in newcomers entering this industry. If you are a beginner trader in cryptocurrency investment, it is recommended to educate yourself on the fundamentals of support and resistance zones and how to utilize this information to generate profitable trades. Even seasoned investors may benefit from this rich knowledge to improve their crypto trading.

Cryptocurrency trading involves speculating on the price movements of cryptocurrencies relative to the U.S. dollar and other fiat currencies or against other cryptocurrencies to profit from their highly volatile movements. Cryptocurrencies are sometimes risky due to increased volatility, resulting in potential losses. Consequently, a sound (backtested) trading plan must be in place before you begin live trading.

Support levels and resistance levels are crucial technical elements to the short-term analysis (as well as longer-term studies) of a cryptocurrency (or any asset for that matter).

Locating Support/Resistance Levels?

At its core, support occurs at prior price lows, and resistance forms near previous price highs. Therefore, one method to determine support and resistance on a price chart is to examine an asset’s most recent highs and lows over a certain period.

Keep an eye out for levels and areas where the price action has tested a price level multiple times and, occasionally, forged a trend reversal. The more frequently a certain price level serves as a ceiling or floor, the more important and well-established the support and resistance level is considered.

Figure 1.A shows horizontal support and resistance lines on a 2-hourly Litecoin candlestick chart.

Roles of Support and Resistance Levels in Cryptocurrency Trading and Investing, FP Markets

(Figure 1. A courtesy of TradingView)

A horizontal line distinguishes horizontal support and resistance levels. You must first choose a previous price point where price action struggled to break above or below. Traders then apply a horizontal line from this price point extending into the future to denote it. The price will likely return from this horizontal line once it comes into view.

Finding crypto (bitcoin [btc], for example) support and resistance levels can be difficult for new traders. If you feel you want to further validate support and resistance areas, numerous technical analysis indicators and tools are available to assist you: Moving averages, Bollinger bands, trendlines, round numbers, the Relative Strength Index (RSI), Fibonacci retracements, and so on.
Moving Average Indicator.

The moving average (M.A.) indicator is frequently used to determine dynamic support and resistance, which can coincide with price-based support and resistance levels. For example, traders use various moving average settings to pinpoint long- and short-term support and resistance levels—10, 20, 50, 100, and 200-day moving averages.

Moving averages allow traders to reduce market noise (filters price moves as moving averages only consider the closing price). In theory, traders looking for short-term gains or short-term market movement will use shorter moving averages (10, 20, 50), and long-term investors may employ longer moving averages—100 or 200 periods, for instance.

Figure 1. B shows an example of a 10-day SMA and a 200-day SMA.

Roles of Support and Resistance Levels in Cryptocurrency Trading and Investing, FP Markets

(Figure 1.B courtesy of TradingView)

Trendline

A trendline’s main purpose is to identify a trend.

However, trendlines can also be used as ascending and descending support and resistance levels. A downward trend (bearish) can be determined by applying a trendline across the lower highs in a downtrend. Conversely, an upward trend (bullish) can be recognized by drawing a trendline across the higher lows in an uptrend.

Figure 1.C shows a trendline resistance, applied to the weekly timeframe using lower highs. If the current test of the descending resistance merges with price resistance, this adds additional resistance (confluence) for a potential sell-off.

Ultimately, the idea is to build a case for a trading opportunity at a support or resistance level. The price support/resistance converging with, say, a trendline, a Bollinger band (upper or lower band), and an RSI overbought signal adds weight to a trade.

Roles of Support and Resistance Levels in Cryptocurrency Trading and Investing, FP Markets

(Figure 1. C courtesy of TradingView)

Trading with Support and Resistance

Cryptocurrencies are well-known for their infamously high volatility. Beginner investors may incur significant losses without a strategic approach and sound trading plan.

With the assistance of support and resistance levels, the backbone of many technical trading strategies, traders can construct a trading strategy. The market’s support and resistance levels might also shed some light on the patterns that are currently in play. So, think of continuation patterns such as flags and pennant patterns.

FP Markets has informative training videos on the crypto market and other financial markets, such as stocks, bonds, commodities, and ETFs.

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