Support and resistance levels are crucial elements of technical analysis. Any trading strategy requires defining support and resistance levels to find entry and exit points. Moreover, it’s vital to know where the price may stop rising/falling. Support and resistance levels can be found on any asset’s chart, including cryptocurrencies. In this article, we will explain how to determine support and resistance in the highly volatile crypto market.
What Are Support and Resistance Levels?
Support and resistance levels are used as barriers for future price movements. In case of resistance, the rising price is supposed to rebound from it and move down. Holders of the asset define the resistance level — traders and investors who bought the asset before and consider this price appropriate for selling. In the case of support, the falling price is expected to rebound from it and move up. Buyers’ sentiment determines the support level — buyers define the price at which they are ready to purchase an asset.
Support and resistance are set based on previous highs and lows. To define the levels, you need to find the most recent points where the price rebounded. The strength of the levels is determined by the number of times a pullback occurred. Thus, if the market changes its direction, touching a certain level more than once, it’s a solid support/resistance point. It means the price is likely to rebound again.
Usually, support and resistance levels are placed horizontally. However, if we talk about trendlines that serve as support and resistance, they can go up if there is an uptrend and move down in a downtrend.
On the chart below, you can see a standard resistance level drawn horizontally.
Tip: It’s worth saying that support and resistance levels are interchangeable. When reading a technical analysis, you may see something like “if the price breaks above this point, previous resistance levels will become support” or “if the price breaks below this point, previous support levels will become resistance.”
Support and Resistance Zones
Nothing is perfect. There are no levels where the market will change its direction with 100% accuracy. Sometimes, the price goes beyond the set level but turns around fast. It is a common thing in crypto trading. As cryptocurrencies are highly volatile, candlesticks form long upper and lower shadows.
Thus, analysts prefer not to set a single support/resistance level, opting instead to set a range or zone where the price may rebound. Such zones are narrow.
For example, let’s say the price formed several peaks. They are not on the same level, but they are too close to each other to consider them separate resistance levels. In this case, analysts combine them into a range, in which the price may rebound next time. The same idea works for a support zone. But the price forms lows, not peaks.
Of course, accurate support and resistance levels are more helpful for successful trading. Still, it’s vital to adapt your trading style to the crypto market. If you are ready to sit in front of a monitor the whole day, you can set accurate levels. However, if you place pending orders, it’s recommended to use zones to avoid losses.
Indicators to Define Support and Resistance Levels
There are many ways to define support and resistance levels. The most reliable way is to use technical indicators, especially for cryptocurrencies, as they are highly volatile. However, it’s also possible to find the levels yourself. We will start with this method.
Define Support and Resistance Based on Previous Reversal Points
If you are unsure which indicator can define support and resistance, you can do it yourself. Find the closest point to where the price rebounded last time. It will be your support/resistance level. If the price rebounded several times from this point, it’s a confirmation that the level is really strong, and the chance that it will rebound again is high.
When you draw a support/resistance level through more than one point, your line can be horizontal or angled if you look for levels within a bullish or bearish trend.
Tip: Although the number of pullbacks reflects the strength of the level, it’s vital to remember that the more a cryptocurrency has rebounded from the point, the more likely it will break above this level next time. The price can’t always rebound from the same level. Otherwise, the market would always move in the same direction.
A Pivot Point indicator is one of the simplest methods to place support and resistance levels. There are different types of this trading tool, including Classic, Woodie, Camarilla, and Fibonacci Pivot Points. We recommend using Classic or Fibonacci levels. However, the type always depends on your trading strategy.
The Pivot Point indicator can be found on the trading platform you use. If not, you can always download it from the Internet.
To define the support and resistance levels correctly, you should choose a suitable period of Pivot Points. For instance, you should set a daily period if you trade on short timeframes — 30-minutes or lower. The Pivot Point levels will be built on high, low, and close prices of the previous day. The levels are updated daily.
If you trade cryptocurrencies on hourly, 4-hour, or daily charts, it’s better to apply weekly Pivot Points. These levels will be updated once a week, as they are calculated on last week’s high, low, and close prices.
If you consider long-term investments, you can implement monthly pivots for a weekly timeframe. The levels will change in a month only.
And, as you could guess, if you trade on monthly charts, you should apply monthly Pivots.
Tip: We wouldn’t recommend using pivot points for long-term cryptocurrency trading. As the crypto market is highly volatile, the market conditions rapidly change. As long-term pivot levels are calculated once a week/month, they can become invalid quickly.
Fibonacci Retracement is another indicator used to define support and resistance levels. Although it’s quite simple, the only challenge you may face is correctly implementing the tool within a price chart.
Fibonacci Retracement levels are used during a trend reversal. If a downtrend just ended, you should draw a base line from the highest to the lowest point of the previous trend. You will see six main levels, including 0.0%, 23.6%, 38.2%, 50%, 61.8%, and 100%. They will define where the price will consolidate. The 50% level is the strongest point for both bullish and bearish trends. A cryptocurrency is anticipated to rise during a retracement of an uptrend and fall during a retracement of a downtrend.
- The Fibonacci base line is always drawn from the left to the right.
- You can add additional Fibo levels if needed.
- Fibonacci retracement can be applied both for a trend reversal and a price correction within an overall trend.
- In a strong trend, previous support/resistance levels will become resistance/support points if the price moves beyond them.
Moving Averages can also be used to place support and resistance levels. Moving Averages are used for indicating support and resistance levels as they follow the market trend. An MA with a correct period moves below the candlesticks in the uptrend and above them in the downtrend. That’s why these lines are used to define support and resistance levels.
However, it’s not the best approach. You should keep in mind when using a MA for cryptocurrency trading that it is a lagging indicator. It means that the line may reach the candlestick later than the price rebounds. Moreover, MA support and resistance levels are often broken. So, the price may move beyond it and change its direction later. That’s why you should combine Moving Averages with other indicators or use them with the levels you define yourself.
For instance, you can apply the Fibo levels together with an MA to confirm Fibo signals. When applying Fibonacci retracement to the price chart on high timeframes, use the 200-period MA. The Moving Average will confirm the strength of one of the Fibo levels.
Moreover, it’s vital to define the correct period of the MA.
- For long-term timeframes, you can use 50-, 100-, and 200-period Moving Averages.
- For short-term timeframes, it’s recommended to use 9-, 12-, and 26-period MAs.
- The bigger the MA’s period is, the stronger the signal is.
Bollinger Bands are also used to determine support and resistance levels. The indicator consists of three lines, but the upper and lower ones can be used as support and resistance levels.
As it’s not the key function of the indicator, you should combine it with other tools to get a reliable signal. When a price trades near the upper boundary of the indicator in the uptrend, you should draw a horizontal line through the most recent peaks. If the Bollinger Bands’ upper boundary matches the resistance line, it’s a sign the price will reverse down.
An inverse rule is applied to downtrend trading. When the price moves downward and reaches the lower boundary of the indicator, you should draw a support line through the recent lows. When the line and the lower boundary match, the support level will be defined.
Tip: Again, you should remember that the cryptocurrency market is highly volatile. That’s why it’s more likely the price will go beyond the boundaries of the Bollinger Bands indicator.
To Sum Up
Support/resistance is a key concept of technical analysis. There are various ways to define these levels. However, the most reliable one is when you draw lines through the most recent lows/peaks. Moreover, it’s important to remember that the increased volatility makes it difficult to place accurate support and resistance levels. That’s why analysts apply support and resistance zones. Usage of zones increases the chance of a successful trade.