How to use support and resistance when trading cryptocurrency

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In order to determine a cryptocurrency market’s price trend, key peaks and troughs must be identified. Peaks are reached at areas of resistance, troughs at areas of support. Support and resistance are central themes to interpreting not only charting patterns, but also a number of Mathematical Indicators.

Support and resistance lines particularly within recent price action help you determine trade entry and exit levels, by providing estimates on the upper and lower trading range.

Before placing trades, crypto traders should assess potential trading ranges (as estimated by support and resistance levels). For example, if intraday range expected on a market is less than 1%, a 0.5% target profit (on one intraday trade) may not be realistic.

Understand support lines, along with mathematical indicators and crypto chart patterns to take your trading to the next level. 

Identifying support and resistance when trading crypto

Support, as the name implies, indicates a price level or area on the chart where buying interest is sufficiently strong to overcome selling pressure, providing either price stability or upward movement. Resistance is the opposite of support, representing a price level or area where selling pressure overcomes buying pressure, stalling or ending a price advance.

Most novice traders realize fairly quickly that determining key support and resistance levels can be challenging. Anybody can identify every top and bottom in a price chart. More important, though, is determining which tops and bottoms will likely provide significant support and resistance. Support and resistance can often be predicted by referencing Previous Highs and Lows, Round Numbers, Fibonacci Retracements and Chart Patterns.

The strength of a support or resistance level generally increases the more times it has been successfully tested, and the greater amount of time in between market attempts to break below support or above resistance. Oftentimes, once the support or resistance level is broken, former support becomes resistance, and former resistance becomes support.

Traders looking to go long when margin trading sometimes place their limit buy orders just above support in the expectation of a successful test and bounce off of support, or just below support on the expectation that the market will break falsely below support, only to rally back towards the top of a range. Buy limit orders are also sometimes positioned just below resistance in the expectation that the market will eventually break resistance, while buy stop orders may be positioned just above resistance with the expectation that the market will find renewed upward momentum on breaks above resistance.

Conversely, traders looking to go short may place sell limits just above support levels expecting the support to eventually break, or may set sell stop orders just beneath support levels with the expectation that the price will continue plunging lower once support is breached.

Sell limits are often placed just under resistance levels, under the assumption that resistance will hold, or just above resistance levels, on the hope that any break above resistance will be temporary with the market falling back beneath resistance after a false break.

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Previous highs and lows on crypto charts

Where rallies have stalled, highs have been made. Where prices have found a floor, lows have been established. The market uses these historical key levels as a guide for future trades. It should be emphasized that support and resistance are not always met at the exact levels of prior lows and highs, but rather in their general vicinity. The more often and the longer a market trades at or near a price level, the more market participants begin remembering the price.

A market may hesitate against selling at a major previous low, as it remembers how the market rallied shortly thereafter. The greater the timeframe a price represents a high or low, the more likely the resistance or support created by that price. A 3-month high on Ripple (XRP/USD) would, for instance, create more overhead resistance than a 1-month high.

Round numbers

Market participants generally remember round numbers more readily. All else held equal, Bitcoin (BTC/USD) would, for instance, when trading at 18k, be more likely to face greater resistance around 20k than at 19k.

Fibonacci retracements

Liquid markets exhibit price retracements guided in part by Fibonacci Retracements ratios. The Fibonacci ratios of 0.618, 0.5, 0.382 and 0.236 help determine where the retracement of a price move may end. For instance, after Bitcoin (BTC/USD) climbed to almost 24k (on Quoinex) in December 2017 from where the Fib line was extended from at the start of 2016, BTC/USD initially retraced almost 50% of the roughly 23k in gains, before finding support. BTC/USD then proceeded to bounce slightly higher before bouncing back to the 23.6% Fib retrace of the same roughly 2-year rally.

Chart patterns in crypto trading

Cryptocurrency charting patterns can also provide guidelines on support and resistance, and are explained in more detail in our Crypto Chart Patterns article.

Moving averages

Moving averages often hint at support and resistance, but it is important to play around with different time period parameters and to try using both EMAs (Exponential Moving Averages) and SMAs (Simple Moving Averages) to see where each market assumes support and resistance.

Role reversal

One key attribute to support and resistance levels is that once broken, they reverse roles. A broken support level becomes resistance and a broken resistance level becomes support. In the Ripple (XRP/USD) chart below, the yellow rectangle zone initially provided support in February and August 2018 before XRPUSD sliced through it early September. Note how XRP/USD struggled to reclaim this yellow zone mid-September and early-October where prior support became resistance.

Trading crypto around support and resistance

Buy and sell orders are generally placed near support and resistance levels, either above them or below, depending on whether the trader is bullish or bearish and whether the trader currently has a position.

Upon entering a new position, it is often prudent to simultaneously submit two pending exit orders: one serves as a stop loss, while the other aims to take profit. The resistance and support lines effectively not only assist the trader in becoming more precise in trade entry, but also help suggest where take profit and stop loss (risk management) orders should be set.

For instance, after entering a long position just above a support line, a trader may look to place a stop sell order just below the support line. Similarly, after having gone short on a market just below a resistance line, the trader may look to place a stop buy order at a point just above the resistance line.

The chart above depicts how when the market approaches a key support or resistance line, “probing” it, a trader can wait to see if the price succeeds in breaking through the support/resistance line before acting, either eventually trading in the direction of the break, trading in the opposite direction, or upon failure of the break, trading either with the expectation of an eventual break, or expecting the support/resistance line to hold.

In the following charts, note the potential placement of buy and sell orders around the support and resistance lines previously illustrated.

 

 

 

Crypto trend confirmation

Support: entry trade

A trader seeing the market near the bottom of the price range or at trend support (as in the chart below) typically waits until the market bounces off of the support level, before going long.

A bounce up from the support increases the likelihood of the price returning to the top of its range (or resuming an uptrend). The order could either be a stop buy, limit buy or market buy, depending on the trader’s urgency of entering the position, his or her risk tolerance, and on where the price is currently within its range.

Support: exit trade

As the market begins bouncing off of support, short sellers should consider taking profits or cutting losses on existing positions.

Resistance: entry trade

A trader looking to profit within the price range may initiate a short position near the top of the price range after the market encounters resistance. The idea is to go short when resistance holds (price fails to break above the resistance level), with the expectation that the price will return toward the bottom of its range. The order could either be a stop sell, limit sell or market sell, depending on the trader’s urgency of entering the position, his or her risk tolerance, and on where the price is currently within its range.

Resistance: exit trade

When it is clear the price cannot break above resistance (by falling back toward support), those with long positions should consider taking profits or cutting losses.

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Breakout Trades

Breakout above resistance: entry trade

A long position can be initiated, with the expectation that prices will rise toward the next (higher) resistance level, or for an uptrend to form or steepen.

Breakout above resistance: exit trade

Short positions should be closed to either take profits or cut losses.

Breakdown below support: entry trade

A short position can be initiated, with the expectation that prices will fall toward the next (lower) support level, or for a downtrend to form or steepen.

Breakdown below support: exit trade

Long positions should be closed to either take profits or cut losses.

Summary

The identification of support and resistance is a prerequisite for establishing an effective cryptocurrency trading plan. Support and resistance lines not only assist trade entry, but also in providing the more critical exit levels for minimizing risk or locking in profit.

In addition to being able to recognize and interpret additional charting patterns and mathematical indicators, you should try to familiarize yourself with general trading principles and market fundamentals. Check out our article on Cryptocurrency Chart Patterns, all of which should be studied in combination with the core concepts of trend, support and resistance.

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This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Darren Chu, CFA

Darren Chu, CFA, is the founder of Tradable Patterns, publisher of daily technical analysis on Bloomberg, Thomson Reuters, Factset, Interactive Brokers, Inside Futures, and other partner websites. Before the launch of Tradable Patterns, Darren served as IntercontinentalExchange | NYSE Liffe's country manager for Australia, India, and the UAE, expanding his role to look after Liffe business development in APAC ex-Japan/Korea until his departure mid April 2014. Previously, Darren was with the TMX Group | Montreal Exchange, marketing Canadian futures and options across North America, London, Singapore and Hong Kong. Darren also launched and managed CMC Markets Canada's Chinese marketing and sales team, along with educational offering. Visit www.tradablepatterns.com for more information.