Support and Resistance are key price levels that act as speed bumps
Support and Resistance levels are used to define the trading channel
A quick intro
Support and Resistance are significant price levels that act as speed bumps that impede the price of bitcoin, for example, to push in a certain way. The price is expected to revert once the key price level has been hit or, if momentum is strong, the price can shatter the level and continue on its way.
What do Key Price Levels tell us?
Key price levels are supply and demand indicators that reflect a level where the crypto is expected to be sold and bought, resistance and support respectively. So, if bitcoin is approaching resistance it means that there is an upward trend and there is a sell wall (resistance) where the price usually reverts and drops.
On the other hand, when bitcoin is undergoing a bearish (downward) trend and the price is approaching a buy wall (support), BTC is expected to bounce off the key price level.
Support and resistance levels are used to define the trading channel, bounded by a sell (resistance) and buy wall (support). If you have successfully defined the trading channel, you’ll end up with adequate exit and entry points.
How to use them?
There are two approaches to defining key price levels. The first one, and the one we’ll be focusing on, is using a charting tool, like TradingView, and draw a trendline connecting significant price levels. The second one requires using other indicators to define the trading channel.
Going back to the basics, once you have opened the charting tool, look for tops and bottoms, or price levels, where bitcoin shifted direction.
Draw a trendline connecting the key price levels, if the price is trading below your defined trendline, consider it as resistance. If the price is trading above your key price levels, consider it as support.
This sounds very biased…
I personally recommend adding some indicators (Moving Averages, RSI, etc.) to determine if the key price levels are indeed support and resistance. The selected indicator should shift direction as the price approaches the key price level.
Aren’t we talking about supply and demand?
Adding volume as a confirming indicator is probably the easiest approach to defining unbiased support and resistance levels. The idea is to look for patterns that justify your hypothesis. Thus, if there is a big green volume bar at support, it means that there is a buy wall. Red volume bars indicate that there is selling action at that level, so it should coincide with resistance.
If you are eager to trade but are not sure if it’s the right time, try defining key price levels to assess your strategy. Never buy at resistance, unless you’re expecting the price to shatter through the sell wall because odds are the price is going to revert once it hits the speed bump. Always buy at or near support, and never trade without a stop-loss.