- Support and resistance levels are critical areas where demand and supply factors meet.
- A resistance level is a psychological barrier that prevents the price from increasing over a given level.
- Crypto traders often aim for a trend reversal at support levels, so a long position is taken.
Support and resistance levels are two of the most widely used terminology in technical analysis; but what exactly do these terms mean?
Support and resistance levels are critical areas where demand and supply factors meet.
They are the most critical levels that an analyst identifies while analyzing any chart. In addition, they can plot psychological levels using supply and resistance levels.
There are several trading setups that can be employed using supply and resistance levels, and how the price reacts while trading around these levels is also a significant metric for an analyst. The most typical trading setting is a move in the opposite direction of the support or resistance.
What are resistance levels?
A resistance level is a psychological barrier that prevents the price from increasing over a given level. It is a price point where traders anticipate a large supply (many sell orders), causing demand to be overwhelmed by supply and the price to decline immediately after approaching the resistance level.
Always draw a resistance level above the current market price.
The resistance zone serves as a signal for traders to book profits in rising markets and assists them in making a better exit. This is because a resistance being broken is less likely, therefore it acts as a sell trigger.
The zone must be created at the proper level for a resistance level to be used effectively. A resistance level will be drawn at a price point where the price has repeatedly failed to cross. A resistance line must have at least two points of contact with the candle’s wick.
Here is a chart of Matic on the daily timeframe. The zone at $1.75 shows the resistance zone.
As seen in the chart, Matic tried to cross the $1.75 level but failed despite several attempts, indicating that sellers are far stronger than buyers at that price point. A resistance level is thus drawn at $1.75, indicating that the price will meet significant resistance and pressure to avoid breaking the zone.
With the help of the Resistance, a trader will be aware of the possible pressure that Matic may experience at $1.75, and a trader will begin booking gains if MATIC is unable to break through the zone. A trader may have alternatively taken a short position at the resistance, which would have produced excellent profits in this scenario; this is known as a reversal trade.
A reversal trade is predicated on the trader anticipating a move on the opposite side of the barrier, therefore a short position on the resistance is taken.
However, it is important to note that after resistance is broken, another setup known as a breakout trade can be employed.
A breakout may be seen when the cryptocurrency is in a strong uptrend with significant momentum, causing traders to hold with the hope of a higher price. When a breakout happens, a trader enters a long position with a stop-loss placed below the resistance level.
When a breakout happens, the resistance zone becomes a new support zone for the currency.
Here is an example of a breakout trade:
What are support levels?
A resistance level is the reverse of a support level. It is the price level at which demand exceeds supply, forcing the price to remain above the support price level. Thus, support, as the name indicates, is anything that prevents the price from falling further. Traders frequently buy long bets at this level because they expect the price to increase from the support level. The support price must be placed below the current market price.
The price is likely to bounce back after hitting the support level and absorbing demand through an increase in the number of buyers and a fall in the number of sellers. This causes the demand to surpass the supply, resulting in a price reversal and an upward movement.
In a declining market, traders normally wait for prices to reach support levels before purchasing since there is a strong probability of a price reversal, which might provide excellent returns for the trader!
A support level is drawn after carefully noting where the price stopped following a decrease; the price level must have worked as a price floor more than once in order to be drawn as a support level.
This a chart of Solana which shows a support level marked at $77 and a resistance level marked at $145.
Solana began to rise after repeatedly hitting the $77 price level, which clearly defined a support level. The gain was halted around the $145 price level, indicating a barrier level that might be attributed to traders taking profits.
A support level is drawn at $77, indicating that purchasers were consistently returning to obtain an opportunity to buy Solana at that price. As a result, the price might be referred to as a psychological support level.
Traders often aim for a trend reversal at support levels, so a long position is taken. As seen in the chart, a trader might have purchased Solana at the price where “buy” is noted and sold around the resistance level where “sell” is marked. This is an example of the previously described reverse trade scenario.
A trader may have maximized earnings by correctly timing transactions by calculating support and resistance levels!!
Conclusion
Technical analysis aims to predict future price movements based on historical price movements, thus it is not always 100 percent correct. However, it will undoubtedly assist a trader in making better trades and more efficiently timing their inputs and exits.
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