Identify and use support and resistance levels when trading crypto

In Trading

Understanding the concept of support and resistance levels is crucial for long-term trading success. At their core, support and resistance levels are historical price areas of high demand.In a downtrend, a support level is an area where traders expect to see a rebound to the upside. Similarly, a resistance level is an area where traders expect to see a rejection to the downside. In many instances, a market’s price action reflects the collective psychology of the majority of its participants, and this holds true in crypto as well. Let’s take a look at Bitcoin on a macro level with the 1D chart.

The first thing you’ll notice is the obvious support region in the USD6,000 area highlighted in green. Over the past year, this price level has been battle-tested many times and has consistently resulted in a bounce to the upside due to buyers outnumbering sellers.

The red boxes depict areas of resistance. Between February and April, Bitcoin tested the USD12,000 level multiple times only to be rejected. Similarly, Bitcoin tested USD10,000 a few times between mid-April and mid-May before another rejection.

Another phenomenon that occurs in markets is when support and resistance level trade roles. In other words, a current support level is likely a past resistance level, and vice versa. In the XRP/JPY 4-hour chart below, you can see a breached support level at JPY54. After that break in support, JPY54 becomes a level of resistance.

In this XRP/JPY 30m chart, there is heavy resistance at the JPY52 level that is tested more than six times. In early November, the resistance is broken and the support is re-tested (this is key), which sets the tone for bull movement up to JPY64.

So, how can support and resistance levels be applied to a margin trading strategy? Since these are important psychological levels, there is almost always some kind of market reaction when prices hit support and resistances. In general, support levels can be good entry points for long positions, while resistances are seen as good shorting opportunities.

With that said, it’s important to wait for confirmation and confluence before entering a position. For example, wait for a support to be re-tested to confirm its validity. Similarly, look for a decrease in RSI to signal decreasing bull momentum as resistances are re-tested. Learn more about mathematical indicators like RSI in this post.

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