When trading with cryptocurrencies, keeping track of various factors that could impact your trading decisions is important. Understanding the asset you are trading and how its price moves is crucial. To achieve this, traders often use different indicators and chart patterns. However, support and resistance levels are important tools traders use to analyze the market.

So, what are support and resistance levels, and why are they important for crypto trading? This guide will explore these concepts and how they can assist you in everyday trading.

What are Support and Resistance

Support and resistance are not technically indicators but two levels that can be used in cryptocurrency trading. They indicate the prices at which a given cryptocurrency will likely find support or resistance, similar to how they function in Forex trading.

Support refers to the lowest price point of a cryptocurrency that it is expected to reach before rebounding and continuing to grow. For instance, if Bitcoin’s support level is $16,000, it is anticipated that if it falls to $16,000, it will rebound and increase in value again.

Resistance is a term used in trading to refer to a price level that indicates the expected maximum price of a crypto asset before it begins to lose value. For instance, if Bitcoin’s resistance level is set at $25,000, reaching this price level implies that the price will likely reverse and start declining.

It’s important to remember that support and resistance levels are not set in stone. Support could always be breached, causing the price to keep dropping. Similarly, if resistance is broken, the price may rise instead of fall.

How to use Support and Resistance Levels in Crypto

Trading strategies can use support and resistance levels, with range trading being one of the most common ways. Range trading is a strategy where you set a price range for an asset and trade within this range. When the price of an asset approaches the support level, you can buy the asset with expectations that the price will increase. Once the price reaches the resistance level and expectations are that it will fall, you can sell the asset and take profits. You can then open a short position when the price reaches the resistance level and close it when it falls close to the support level to take profits. This process can be repeated.

A crypto trading strategy involves looking for the cryptocurrency to break through the support or resistance level. If you examine the charts and observe that the support level has been breached, the price is expected to continue to fall, and a new support level will emerge at a lower price point. You may open a short position to profit from the decline. Conversely, if you notice that the resistance level has been broken, consider opening a long position, as the expectation is that the price will continue to rise. These occurrences are commonly called “breakouts” and can be a beneficial tool for generating additional profits.

It is important to note that relying solely on support and resistance levels when trading is not recommended. Instead, these levels should be used as supplementary tools, incorporating more advanced technical indicators and signal provider tools to gain a more accurate and detailed understanding of market activity and trends.

FAQs on Support and Resistance in Crypto

How can I identify support and resistance levels in crypto trading?

Various indicators are available to identify support and resistance levels in cryptocurrency trading. These indicators can be found in the Indicators tab of MetaTrader. Some indicators are designed specifically for support and resistance, while others are classified as such based on their behavior. These indicators can be superimposed onto the chart to help traders locate these important levels.

What happens when the resistance level in crypto is broken?

The token price is expected to continue rising whenever crypto resistance is broken. Support and resistance levels change when resistance is broken and the price increases unless the resistance reverses quickly.