Crypto is dynamic. Prices will always move, influenced by market dynamics of supply and demand. While not desirable to some, the resulting volatility does provide opportunities for traders. Regardless of their strategies, all traders will feed on crypto price volatility in the hopes of making a profit.
As an illustration, Tron (TRX) was at all time highs around $0.18 back in April of 2021 but had fallen back to support around $0.0464 throughout 2022. The digital currency is now rallying back up near all time highs with it price at $0.17 on August 25, 2024, according to Binance.
Just as this illustration of TRX shows the high volatility in crypto markets means that inexperienced traders more often than not lose money. The good news is that on platforms like Binance, there are over 60 technical analysis tools that a trader can use before making buy or sell decisions.
This article will discuss support and resistance lines and various trading strategies around these levels.
Understanding Support and Resistance
Undoubtedly, support and resistance levels are core concepts of technical analysis.
They represent price zones where market sentiment, as observed over time, tends to shift.
You can think of them as local “barriers” that can limit price.
Depending on how prices react at these key lines, traders can take advantage of emerging price reversal opportunities or breakouts.
To simplify:
Resistance levels can be seen as ceilings. They are zones where there are more sellers than buyers. Often, crypto prices tend to reverse from these levels due to increasing selling momentum made worse by profit-taking. Support levels are areas where there are more buyers than sellers. Unlike resistance levels, prices tend to recover steadily from this region, driven mainly by the influx of new buyers expecting prices to print higher and the shift of momentum from bearish to bullish.Identifying Support and Resistance
So, how do you identify support and resistance levels? We will take the example above to show support and resistance levels on TRX.
There are several ways of doing so.First, you can identify recent highs and lows. All you have to do is cycle back and look for areas where prices bounced or peaked. If, for example, Tron tends to recover from the $0.0464 level and peaks at $0.17 on multiple occasions, then these price levels can be support and resistance.
Second, you can draw trend lines to connect consecutive highs and lows to pick out trends. These trend lines will act as support or resistance. Third, while not popular among new traders, some chartists can use the Fibonacci retracement indicator. This tool uses the Fibonacci ratios, for example, 23.6%, 38.2%, 61.8%, or 78.6%. A trader must identify the recent swing high and low to draw the Fibonacci retracement. Pasting the indicator on this range, the Fibonacci ratios will be mapped out and serve as support and resistance levels.Support and Resistance Trading Strategies
Once you pick out support and resistance zones, there are two popular ways of trading:
Bounce-Offs: Since prices tend to recover (from support) or fall (from resistance), a trader can place buy or sell limits around these levels. Breakouts: Another approach is to wait for a clean break above resistance or support, before placing a trade. If crypto prices break above the resistance, it could signal buy trend continuation and the end of price consolidation.Conclusion
Traders should refine the art of identifying and leveraging support and resistance levels in their strategies. While they can enhance profitability, they must be used with other tools and indicators for traders to make more informed decisions.
The post How to Use Support and Resistance Levels in Crypto Trading appeared first on CoinChapter.