What happens when the price of a token reaches the support or resistance levels, how to identify these levels and what are the benefits and risks of using them while trading. Find out more here -
The terms ‘support’ and ‘resistance’ are used quite often among crypto traders. They are fundamental indicators that can help investors gain valuable insights into the strength of a price trend. They may also provide cues to the future price action of an asset.
However, novice investors usually draw a blank when these terms are mentioned; some even confuse the two with each other. Keeping this in mind, we’ve quickly rounded up all the vital information about support and resistance levels and how they can help investors make better-informed trading decisions.
What are support & resistance levels?
Looking at a price chart, you may notice a point that a token finds hard to surpass. This price point is called the resistance level. You may have also seen a price level beyond which the token will not fall unless a drastic negative development occurs. This price point is called the support level.
The price movements of a token can be compared to your movements at home. You can neither cross over beyond your ceiling nor fall below your floor. You must move within the space in the middle. The resistance level acts as a ceiling, and the support level acts as a floor to the token price.
What happens when a price reaches the support or resistance levels?
When the price of a token moves upwards, it faces a barrier at its resistance level. This resistance is caused by investors looking to cash out and book profits. The market witnesses a mass influx of sell orders at such a time. This increases the token’s supply. And if the supply exceeds the demand for the token, its price may reverse and start to decline. However, if investors choose to hold on to their tokens, the price may continue its uptrend.
Conversely, when the price of a token begins to drop, it will eventually hit the support level. At this time, the market gets flooded with a plethora of buy orders because investors can enter at a much lower price point. This drums up the demand and propels the token price. On the other hand, if fear, uncertainty and doubt (FUD) overcome investors, it could lead to panic selling, which will result in the price falling below the support level.
If the price breaches either the support or the resistance level, it will continue to pursue price points in the same direction. So, if the price falls below the support, it will continue to fall and establish a lower support level. Similarly, if the price moves beyond the resistance, it will continue to surge and create a higher resistance level.
How do you identify resistance and support levels?
Identifying these levels is easy. All you need to do is look at the price chart of a token and identify the highs and the lows in a particular period. You can look for rallies and pick the point where it stops – your resistance. Similarly, find out where the price bottoms out during a market correction – that is your support.
It is a ‘strong’ resistance or support level if a price point is hit frequently but not breached.
There are other ways to find out resistance and support levels, such as through the Moving Average Indicator and Trendline Indicator.
Benefits and Risks of using support/resistance levels to trade:
|Market movements & trends can be identified easily.||False indications are likely as crypto markets are very volatile.|
|Good indicators of entry/exit points in the market.||The volatility makes it harder to spot these levels.|
The resistance level restricts further upward movement and is generally marked by high supply & low demand. The support level impedes further downfall and is marked by high demand with low supply.
Note that these levels are merely indicative — even the strongest supports and resistances can be breached. Therefore, investors should not make a trading decision based solely on support and resistance levels.
First Published: IST