Knowing when to enter a trade or make an investment may seem like a simple task looking back, but it can be a very hard skill to master.
Everyone is a trading or investing genius in hindsight, As we mentioned in our Technical Analysis(TA) blog some time back, there are many indicators you can use for your trading strategy and no one indicator can give you everything you need to make every trading decision, but in this How To Crypto Report, we will cover support and resistance.
With the bull market in full swing, every day I see people jumping in a trade or investment after a particular cryptocurrency has just experienced a 50-300% or more increase in price prior. Sometimes there are not many negative repercussions in this behavior in a bull market if price continues to rise, but over the long term this can be a very damaging strategy. Remember, having no strategy is also a strategy and it is the worst one.
Just in the past week on social media groups, I’ve seen people complaining about this coin or that coin dropping in price after they bought in, when in one case that coin has an increase in price of 3000+% over the last year. Even in bull markets, retracements and dips in price are normal and should be expected. But to the undisciplined person who trades off of emotion, it can leave them in despair when the market turns against them.
You need to determine a strategy and make your decisions based off of your strategy and not off of emotions and FOMO. Identifying support and resistance levels can be a key tool in your trading and investing toolbelt as this can prevent you from entering a trade after the price has already pumped, or if you do enter, you understand the risk and potential for the price to dip.
/Support and resistance levels are price levels that an asset is unable to penetrate easily, acting as a barrier to either suppress price as resistance, or hold up price in terms of support./
(Image taken from: https://wavefxtrading.com/forex-trading-basics/support-and-resistance/ )
Sure identifying them can be considered hard to identify exactly, but understanding what most are looking at to identify these support and resistance levels can help improve your trading success. Most of the time the answers are in the past. When in doubt, zoom out. You can scroll back on charts and see how price action has reacted to past support and resistance levels. Instead of looking at support and resistance as a set level, look at it as a general area or range on the chart.
Think of support as the floor and resistance as the ceiling. The better you get at identifying these ranges, the better you will become, especially in day trading or scalp trading. Typically, once price breaks through these areas of support or resistance, they will flip. As in former resistance could become support and former support can become resistance. The main reason is that to break through these levels, there needs to be a higher than normal trading volume at these levels especially when the major consensus among most is that those are support and resistance levels.
Traders will use support and resistance to identify short or long term reversals in price which can provide opportunity to enter or exit a trade. Understanding this can also help you identify your risk management strategy as sometimes these levels are breached temporarily but then reverses back the other way. There are 4 main types of support you can identify and use. The first one we mentioned above as far as levels with high trading volumes.
You can typically look back on a chart and see how it has reacted at that level in the past and even draw a line through the chart to show the correlation. The second type of support and resistance are psychological levels. We see this all the time in Bitcoin history with round numbers like the $1000 level, $10,000 level, etc. Many uneducated traders will make buys or sells at whole round numbers and experienced traders know this and trade against it. Key levels that have been hard to break in the past or are a target for traders become psychological support and resistance levels to the mass market.
The third type of support and resistance levels is support and resistance based on trend lines. This can be short or long term trend lines, either going up or down. Looking at how trend lines have reacted historically, traders expect that line to continue to act as support in up trends and resistance in down trends. Of course there are always reversals so that is why this is never the case 100% of the time. Moving averages, which is a trend based indicator can also be used to act as support or resistance.
The last type is support and resistance based on Fibonacci levels. The Fibonacci theory shows that most things in nature have set numerical levels of repeating. Adding a Fibonacci indicator to a chart shows some of these key levels that can act as support and resistance. Some will say this is not reliable, but any indicator can become more reliable as more and more traders use it. If everyone is expecting a market movement or reversal based on Fibonacci levels, then they will trade in that manner, making the prediction true. Always remember, markets are driven by human behavior.
Learning to identify these support and resistance levels can greatly improve your trading decisions. Using confluence, or multiple types of support or resistance levels showing the same or similar thing can help you to better confirm your trade. This rings true for other indicators and charting tools that can be used in conjunction with support and resistance levels.
If you want some help to learn more about this and see it on a chart, go the the Moon Lines tool in Newscrypto platform as you can see support and resistance levels drawn on the chart for you. As you learn you can reference Moon Lines to confirm what you are seeing or to save some time. Even as an experienced trader, I still pull up Moon Lines tool, to save some time on my market research. Learn support and resistance and you will greatly improve your trading strategy.
Content written by Blockchain Wayne and NewsCrypto Team