Crypto Trading 101: How to Use Support and Resistance

Crypto analysts often cite two key markers when predicting whether a price of a given coin or token is set to rise or fall. These markers are psychological “support” or “resistance” lines – price points that offer a sort of floor or ceiling for prices. For instance, an analyst might say bitcoin’s price is struggling to break through a $20,000 resistance layer – meaning investors are showing a reluctance to buy BTC as it nears $20,000.

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On the other side, traders may say there’s “support” around a price point or range for an asset, meaning the price tends to bounce back up whenever the asset nears that price because investors now see it as a bargain, and will swoop in and buy it, stopping further drops in price.

In simplest terms, resistance is where the market stops buying because it deems the asset too expensive, while support is the price where the market sees the asset as a bargain and will buy it.

Once either support or resistance lines are breached, however, technical analysts believe that will cause the price of a cryptocurrency to rise or fall in dramatic fashion.

The “resistance” signal roughly translates to something like, “If bitcoin reaches $20,000, then its price will really fly like the wind!” This is because the analyst assumes that when a cryptocurrency’s price has grown to a certain level, its rise has been significant enough to convince people will buy it in droves. In other words, it has broken through some psychological barrier that has prevented people from buying the coin, and there is now enough gusto for the coin to further go up in price.

But if the market’s winds change, the same analysts might take an opposite tack. “Ah, if bitcoin falls below its support level of $19,500,” they might say, “its price surely will fall much further. Get out while you can!” This is because the analyst assumes that prices have fallen by so much that the market has lost confidence in the coin; if there are no longer enough buyers who consider its price attractive enough to hold, sellers will overpower them. Consequently, the analyst expects the price of the asset to fall.

In a nutshell, these trading signals provide a very rudimentary interpretation of the near future of the market for a cryptocurrency. They are the hallmark of the technical analyst, someone who spends his or her day drawing lines on graphs to determine the future price of an asset, in this instance a cryptocurrency.

The technical analyst relies on historical data to predict the future on the assumption that history repeats itself. These analysts diverge from that other kind of analyst, the fundamental analyst, who values an asset on its inherent qualities. Technical analysts don’t care about that; for them, the crypto market is a numbers game, where past prices and trading volumes inform the future.

See Also: Is Technical Analysis Prophetic or Preposterous? We Asked 7 Crypto Traders

How to interpret support and resistance levels when trading

Support and resistance levels are useful to traders who want indications about the near future of a cryptocurrency’s price. A trader who buys a cryptocurrency ahead of a coin breaking through a predicted “resistance” level could sell for a profit shortly after the coin reaches said level, if the coin has, as predicted, risen in price. The converse is true for those who want signals about when to exit the market before a coin becomes oversaturated.

Technical analysts defer to different methodologies when constructing support or resistance lines on popular analytics platforms, like TradingView. The simplest tool is to draw a horizontal line on a coin's charted movements to look at the peaks and troughs, deducing from these events the prices at which traders are likely to buy the cryptocurrency and pump the price, or sell the cryptocurrency and sink the price.

Others use simple moving average trend lines to spot support and resistance levels, using, for instance, 200-day and 50-day moving average lines to identify points of support and resistance:

Sometimes analysts rely on no firm mathematical methodology at all, instead drawing lines as they please that support their arguments. Because the support is psychological, the market and its analysts tend to put these lines at round numbers like $20,000 or $2,000 or $200. Consider the screenshot below, a price chart of bitcoin onto which an automated script has superimposed support lines:

The advice, according to the technical analysts, is to buy an asset when it bounces off the support level and get out of the trade after the resistance level fails to break.

Other tools to identify support and resistance

Horizontal lines are just one analytic tool in the kit of a technical analyst, as well as using moving averages, which we discussed above.

Another advanced metric used to identify support and resistance is the Fibonacci retracement line.

This identifies potential future ranges from Fibonacci numbers – a sequence of numbers where each entry is 1.618 larger than the preceding number. Cryptocurrency traders use Fibonacci retracement lines because they provide the highest and lowest possible prices in a certain period of time, then dividing the distance on the chart by these Fibonacci ratios to provide glimpses into the future.

Analysts also use Bollinger Bands, another method that provides three trend lines: average prices over a given time period, plus upper and lower trends for that period.

It should be noted that none of these tools provide conclusive insights into the future prices of cryptocurrencies. Instead, they are used to predict prices and should be taken with a pinch of salt. Sometimes history repeats itself, but not always.