Terms such as support and resistance points, technical analysis; are the main key terms of the investor trading in the cryptocurrency market. Support and resistance are shown as horizontal or angled lines.
Support is a price level at which the price tends to rise again after a period of decline. At this level, since buyers find cryptocurrencies attractive enough to buy and sellers are less willing to sell; Demand usually rises, preventing the price from falling further. If the support level does not hold and the price of the cryptocurrency continues to fall, this indicates that the bearish feeling is increasing.
The resistance level is the opposite of the support. When the price reaches resistance, it means that buyers are less inclined to buy cryptocurrencies at that price level, and where those who hold or previously bought cryptocurrencies find them attractive enough to sell. We can say that the resistance level is the maximum price of an asset predicted by those who invest in the crypto market during this period. In case of increased demand and bullish weather of market participants, the resistance level is broken and the price finds a new resistance higher and the previous resistance level can turn into a support line. Conversely , if the price falls far beyond the drawn line, the previous support level could also turn into resistance.
As a general rule, when the support area is broken, it can turn into a resistance area. When the support area breaks and the price trend is to the downside, traders are usually used to get a confirmation (re-test) of the 4-hour close. The fact that the previous support zone now acts as resistance (or vice versa) confirms the pattern.
Support and resistance lines (Trend Line) also determine the trend of the cryptocurrency. In an uptrend, the support and resistance lines face upwards, and each high high is higher than the previous high peak, whereas in a downtrend, the opposite happens, and each high forms a lower peak than the previous one.
How to Draw Support and Resistance Lines on a Chart?
It’s really easy to do, you just need a price chart and a tool to draw lines. Just follow these steps:
1 . Find the next major prices above and below the current price and pull the support and resistance levels.
2 . Take a look at the overall chart to see how the cryptocurrency price has moved at these levels before and whether it makes sense. Remember that support and resistance can turn each other into one another.
3 . Repeat the previous steps to determine the next major levels. As a result, you will receive a chart with several lines that could be potential major support or resistance levels.
Psychological Support and Resistance
We do not need to reconcile psychological support and resistance with any technical model. When we combine the weak predictions of investors, previous price movements, and the thoughts they have formed in their own minds, psychological support and resistance are formed.
In general, when buying any vegetable from the grocery store, we do not say 1,378 kg or 990 g in kilo. There is a similar situation in the crypto money market. Easily divisible decimal prices are $8, prices like $10, etc., which can often serve as support or resistance on a price chart compared to decimal prices like $8.0674.
Let’s take a look at the BTCUSD example in the table above. As BTCUSD approaches $49,000, some traders place sell orders just below this level to make sure their orders are executed. Since many traders expect a reversal from 49,000 USD, the market does not reach it easily and just before it bounced back from a figure of 48,985 USD.
Moving Average Support and Resistance
As markets become increasingly complex, hundreds of different technical assistance indicators have been produced in recent years, one of which is the Moving Averages. (Moving Avarages, MA) Although there are different variations of moving averages, their underlying purpose is to provide clarity in trading charts. Since these moving averages are based on historical data, they are considered to be indicators that follow the indicators with a delay or follow the trend. Despite the various types, Moving Averages are generally divided into two distinct categories: Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). Depending on the market and the desired result, traders can choose the indicator that will benefit them the most.
Because Moving Averages use historical prices instead of current prices, they have a certain amount of lag. The wider the data range, the greater the latency. For example; A moving average that analyzes the last 100 days will respond more slowly to new information than a moving average that considers only the last 10 days. This is because a new entry into a larger range of data has a smaller impact on overall prices. Larger data ranges benefit long-term investors because they are unlikely to be drastically altered due to one or two large fluctuations. Short-term investors usually prefer a smaller data range.
A moving average can act as a kind of support and resistance. As with most indicators, the longer the timeframe you use, the stronger the support or resistance. The slope of the moving average over a longer time frame can help you identify a trend. Simply put, if a moving average is sloping upwards, this supports the fact that the asset is in an uptrend. Similarly, if the moving average is tilting downwards, it is likely that the asset you are evaluating is in a downtrend. Taking the historical data in the daily tranche of the BTCUSD chart below, notice how the slope has changed in recent days, which indicates that the price has entered a downtrend.
We can also use intersection points to determine support and resistance in moving averages. If we use 2 or more moving averages on the chart, this becomes easier for us.
When we use 2 moving averages, one should show a longer period than the other. So after opening a short-term moving average (MA) and a long-term moving average (MA), we will need to pay attention to the intersection points (MA).
- Short-term MA cuts above long-term MA: Bullish signal
- Short-term MA falls below long MA: Bearish trend signal
Let’s try to explain it in the table below:
Fibonacci Support and Resistance
As you know, the prices of any asset cannot constantly move in one direction; there is no rise forever, no fall forever. The trend is periodically replaced by a correction. It is quite difficult to predict the depth of the price reversal, i.e. the trend, but there are technical analysis tools that allow us to predict the possible scope of the correction.
It is a very popular technical analysis tool used to determine possible levels of price change. The construction of such levels is based on coefficients calculated according to the Fibonacci number sequence.
Using the Fibonacci Levels tool, you will notice that in-trend corrections usually end in 23.6, 38.2, 50.0, 61.8 and 76.4 (%). However, the most popular levels are 61.8% and 38.2%. When used in investment strategies in cryptocurrencies, they are considered by many analysts to be the most durable and reliable.
To plot Fibonacci levels, the minimum price value in an uptrend and the maximum value in a downtrend are taken as the starting point. If we explain more clearly in the graph below: from 1 to 0 the situation will show us the pullbacks. The initial price fell to exactly 0.382 (38.2%). You see how the price hit the 0.618 and 0.786 levels clearly and formed a channel between these levels until it broke down further for about 2 days. At this point, you can also see the support points.
Regarding Fibonacci levels in general;
- 23.6% and 76.4% are considered relatively unreliable levels,
- Corrections in the 38.2% and 50% field are considered more or less reliable,
- The most convincing corrections are thought to be in the area of 61.8%, which is based on the so-called “golden ratio” .