Support and resistance are crucial terms when you’re talking about trading. There’s support for a certain price range, and there can be resistance to go below or over a certain value. In crypto trading it’s important to recognize support and resistance.
These barriers can have a big effect on the price of an asset. When traders regard a certain price level as a good entry or exit point, it will continue to be a barrier for future prices until needs are satisfied.
Support vs Resistance
We talk about support when buyers consider a certain price to be a good buy. We consider the ‘Price X’. They think the asset is undervalued and that creates lots of demand by the market. Because of this, the price will go up. So ‘Price X’ will increase in value.
When the price goes up enough, investors will consider the asset to be overvalued. We call this moment resistance. They will sell their assets and take a profit taken from difference the market gained from the previous support level. ‘Price X’ has increased with Y, and therefore Y becomes the profit gained by traders who bought at price point X.
When enough people sell the asset, the price will drop again. Previously we’ve seen there was support at price point X, so that’s likely to happen again. This entry level for traders is called support.
Support and resistance are most easy to recognize when you zoom out on a chart. There are horizontal lines to be drawn that can clearly indicate the level of support or resistance. Often these support and resistance lines can also be drawn as areas of support and resistance.
These horizontal lines can easily be drawn just by connecting the dots. In this case you need to connect the lowest parts of a candle over – preferably – a longer period of time. In the examples pictured above, we’ve used a short period of time though.
When the barriers brake
A resistance barrier and support barrier is only a barrier when it can be broken. When such a barrier is broken, we are talking about a major shift in sentiment. Especially when a barrier measured over a long period of time has been broken. When a support levels falls, we enter a bearish situation, while breaking a resistance level is a bullish move. What will happen is that a bull or bear flag will break through the barriers, followed by a new moment of consensus. New resistance and support barriers will be created by the market and the theater starts all over again.
Note that resistance and support barriers can be measured over short and long periods of time. Support and resistance areas can help to show you at which range there’s strong demand and supply for an asset. Identifying these support and resistance areas is one of the key elements in trading.