What are support and resistance levels? Guide to using support and resistance levels in cryptocurrencies

Table of contents

• What are support and resistance levels?
• Support position
• Resistance level
• Why are support and resistance levels important in cryptocurrency trading?
• 1. Forecast price trends
• 2. Enhance decision-making skills
• 3. Set stop loss and take profit orders
• 4. Build confidence
• Identify horizontal support and resistance levels
• Key price levels
• Pivot Point
• Understand dynamic support and resistance levels
• Moving Average
• How they work:
• Fibonacci callback and extension levels
• Case Study: Applying Support and Resistance in Hypothetical Trading
• Scene settings
• Develop a transaction plan
• implement
• Assuming results
• Lessons learned
• Common mistakes to avoid when using support and resistance
• 1. Over-reliance on support and resistance
• 2. Ignore the importance of time frames
• 3. Misunderstanding and false breakthrough
• 4. Failed to adjust the level as market conditions change
• Summarize

Support and resistance levels are basic concepts in technical analysis and play a key role in predicting market trends and guiding trading decisions. Understanding these levels in cryptocurrency trading can help you identify potential entry and exit points and increase the likelihood of successful transactions.

Below, we will cover the basics of support and resistance levels, explain how to identify these levels, and provide practical insights to use them in trading.

What are support and resistance levels?

Support position

Support is the price level where cryptocurrencies tend to stop falling and may rebound due to increased buying interest. It represents a concentration of demand for traders to be willing to buy assets, preventing further price declines. Support levels are usually identified by analyzing historical price data to find points where prices continue to rebound after falling.

For example, if Bitcoin repeatedly rebounds from $95,000, then this price level can be considered as support level. Traders often monitor these points to identify potential entry opportunities.

Resistance level

Instead, resistance is the price level where cryptocurrencies tend to stop rising and may reverse downward due to increased selling interest. It reflects the supply concentration point where traders are more inclined to sell, limiting further price increases.

For example, if Ethereum struggles to break through $4,000 multiple times, this price level becomes the resistance level. Traders often use resistance levels to identify potential selling opportunities or points to exit trading.

Why are support and resistance levels important in cryptocurrency trading?

Support and resistance levels are important tools in cryptocurrency trading for several reasons. They not only help traders predict price trends, but also provide the basis for strategic decision-making. Here are the reasons why these concepts are so important:

1. Forecast price trends

Support and resistance levels provide insight into potential price reversals or continuations. Traders expect an upward rebound when the price approaches support. Conversely, when the price approaches resistance, it usually indicates a downward reversal. These insights allow traders to be ahead of market trends.

2. Enhance decision-making skills

These levels allow traders to make informed decisions about when to enter or exit a trade. For example:

• Buy near the support level when the expected price rises.
• Sell or short near resistance to take advantage of the potential decline.

3. Set stop loss and take profit orders

Support and resistance levels serve as reference points for risk management:

• Stop Loss Order: Traders can set stop loss orders below the support level to minimize losses when the price breaks down.
• Take Profit Order: Resistance level helps traders set actual profit targets and exit trading before potential price reversals.

4. Build confidence

For beginners, understanding and using support and resistance levels builds confidence by providing a structured trading method. These levels reduce emotional decision-making and promote consistency and discipline in trading strategies.

Identify horizontal support and resistance levels

Horizontal support and resistance levels are static and are easily identified on the price chart. They form obvious barriers to price movement based on historical price points where major trading activities occur. Here is how to identify and use them:

Key price levels

The key price level is the psychological price point in which traders often respond to market sentiment. These levels are usually integers (e.g., $10,000 for Bitcoin or $1 for smaller altcoins). They attract a lot of attention because traders tend to place orders near these values, strengthening their position as support or resistance levels.

How to identify key price levels:

• Look for price points on the chart that have changed directions many times in history.
• Pay attention to the level of surge in trading volume, indicating strong market activity.

For example, if Bitcoin continues to rebound around $20,000, this level becomes the horizontal support level. Similarly, if $30,000 repeatedly blocks its upward movement, it becomes the resistance level.

Pivot Point

The pivot point is the level calculated based on the highest, lowest and closing prices of the previous day. They serve as reference points for potential support and resistance levels in the next trading period.

• How to calculate a pivot point:

Pivot Point (PP) = (highest price, lowest price, closing price) / 3

• Support level: Calculated as support level = Pivot Point (PP) - (Maximum Price - Lowest Price)
• Resistance level: Calculated as resistance level = Pivot Point (PP) (Maximum Price - Lowest Price)
• Why pivot points matter:
• Traders use it for short-term strategies.
• They help predict intraday price trends and determine entry and exit points.

Understand dynamic support and resistance levels

Dynamic support and resistance levels are different from horizontal levels because they change with asset prices. These levels come from technical indicators that move with the market, providing more nuanced insights into price behavior. Here are two common tools for identifying dynamic levels:

Moving Average

Moving average (MA) is one of the most commonly used indicators for identifying dynamic support and resistance levels. They smooth the price data for a specific period, creating lines that reflect the average price.

• Moving Average Type:
• Simple Moving Average (SMA): Average closing price over a set period (e.g., 50-day SMA).
• Exponential Moving Average (EMA): Gives greater weight to recent prices, making them more sensitive to current market trends.

How they work:

• When the price is above the moving average, the MA can act as a dynamic support level.
• When the price is below the moving average, MA serves as a dynamic resistance level.

For example, in an uptrend, the 50-day EMA often serves as a support level, which may rebound when the price pulls back.

Fibonacci callback and extension levels

Fibonacci callbacks and extension levels are tools based on Fibonacci sequences, a mathematical pattern that is widely used in trading. These levels help identify potential support and resistance areas during a price pullback or extension.

• Key Fibonacci levels :
• Callback levels: 23.6%, 38.2%, 50%, 61.8% and 78.6%.
• Extension level: 161.8%, 261.8%, etc.
• How to use Fibonacci levels :
• Callback : Draw the Fibonacci line between the important highs and lows. The level of the callback indicates that the price may find support during the callback.
• Extend : Use extension levels to predict where prices may encounter resistance when they break upwards.

For example, if Ethereum pulls back to the 61.8% level after a rise, it may find strong support there and then continue the uptrend.

Case Study: Applying Support and Resistance in Hypothetical Trading

Scene settings

Let's use the CoinEx Token (CET) trading pair with USDT to analyze a hypothetical transaction. Assume that the price of CET is traded at $0.045 and shows support and resistance levels based on historical data.

1. Identify support and resistance

• Support level : $0.040 – The price confirmed as the continued rebound of CET in the past.
• Resistance level : $0.050—CET has encountered selling pressure levels many times.

Develop a transaction plan

• Target : Buy CET near the support level and sell near the resistance level to take advantage of the price range.
• Metrics used :
• Horizontal line: Support at $0.040 and resistance at $0.050.
• The 50-day exponential moving average is used for dynamic levels.
• The Fibonacci callback is used for the exact entry point during the callback.

implement

• Entry Point : Set buy orders slightly higher than the support level at $0.041 to ensure transactions are completed in the event of a potential rebound.
• Stop Loss Order : Set a stop loss at a slightly lower support level of $0.039 to limit losses when the price breaks down.
• Exit point : The target is profit-taking at resistance level 0.049 or 0.050 USD.

Assuming results

• The price rebounded from $0.041 and rose to $0.050 in three days, reaching its target.
• Profit : (sell price - buy price) × position size. For example: If you buy 10,000 CETs for $0.041 and sell for $0.050, your profit will be:

(0.050 - 0.041) × 10,000 = $90.

Lessons learned

• Support and resistance levels provide clear entry and exit points.
• Setting a stop loss below the support level minimizes trading risks.
• Combining horizontal lines, moving averages and Fibonacci levels improves accuracy.

Common mistakes to avoid when using support and resistance

While support and resistance are powerful tools for cryptocurrency trading, traders often make mistakes that can lead to losses. Here are some of the most common mistakes and ways to avoid them:

1. Over-reliance on support and resistance

Many traders mistakenly use support and resistance levels only as decision-making basis. While these levels are valuable, they should be used in conjunction with other technical indicators such as volume, RSI or moving averages for a more comprehensive analysis.

2. Ignore the importance of time frames

Support and resistance levels may vary significantly over different time frames. For example:

• Shorter time frames may show more unstable and less reliable levels.
• Longer time frames, such as daily or weekly charts, usually offer stronger and more reliable levels.

Always ensure that trading strategies are consistent with the appropriate time frame.

3. Misunderstanding and false breakthrough

A false breakout occurs when the price briefly breaks through the support or resistance level but then reverses the direction. Traders who overreact to false breakthroughs may enter or exit the trade prematurely.

Solution : Wait for confirmation before taking action. For example, make sure the price closes above a certain level on a higher time frame to verify the effectiveness of the breakthrough.

4. Failed to adjust the level as market conditions change

Support and resistance levels are dynamic and will change with the new price trend. Some traders failed to update their charts, resulting in an outdated analysis.

Solution : Review and update your level regularly to reflect current market conditions.

By avoiding these common mistakes, traders can improve the effectiveness of their strategies and reduce the likelihood of losses.

Summarize

Support and resistance levels are indispensable tools for cryptocurrency traders, providing the basis for understanding price behavior and making informed decisions. By identifying key levels and dynamic levels, traders can predict potential price movements, set effective entry and exit points, and manage risks efficiently.

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