When you scroll through Crypto Twitter and see the charts of some traders and analysts it can get pretty scary. You'll see so many lines and indicators and to be honest if you're not into trading it can be pretty intimidating. But there is no need to be oppressed, sometimes you need to keep it simple and stick to the basics. One of the most basic strategies is what I'll be discussing right now and yes it guarantees you wins. This is the use of support and resistance.
Support and Resistance identifies important price levels where historically the price reacted and it can leave clues for future price behaviour. Trading platforms allow you to be able to identify these key levels and traders attach much significance to them. One beautiful thing about the Support and Resistance is that they can flip roles and the support can become resistance and the resistance turn support. This strategy can be used to determine the range of a market, trade reversals, pullbacks, bounces or breakouts. As a trader, you should have your own rule for entry and exit at support and resistance so you should work on building yours too. But first, let's understand what support and resistance mean fully.
A support level is where the price of an asset tends to stop falling. We can say a support is kind of like a floor that stops the Cryptocurrency from falling, so you will be looking for a point where the price touched on the way down multiple times and reversed back up. For a price level to be seen as a support, I would advise that it has stopped price fall at least three times. For instance (not true just for the sake of this example), if the price of Bitcoin is $6000 and the price drops to $4,500. If you check your chart and you find out that four other times in the past say one month when the price falls to $4,500 it begins to go back up then $4,500 is a key support level and you might want to buy at that point because it is almost guaranteed to go back up. That price point can be considered to be a safe entry point because at that level the bulls fight to get the price back up.
A resistance level on the other hand is a point at which the price of the asset stops rising. The resistance is literally the opposite to the support level, and if we say the Support is the floor then the resistance is kind of like a ceiling that stops the price increase. When the price gets to the resistance, then the sellers begin to sell the asset. For instance (using the same unreal example we used in the Support), if the price of Bitcoin is at $6000 and you check the chart and find out that 5 previous times in one month whenever the price got to $7000 it started to go back down, then that's a key resistance point. You might want to sell when it gets close to that price because it will most likely reverse.
Support and Resistance have a psychological effect on traders. When approaching or at a key Support or Resistance level you can expect massive buys or sells (as the case may be) because they are expecting a reversal. One funny thing about these two is that they interchange, a support level might become a resistance, and a resistance can turn to a support level.
For instance (hypothetical like our previous examples), if the price is $6000 and it goes past the $7000 resistance to say $8000, then $7000 can turn to the new support.
Likewise, if the price falls from $6000 below the previous Support of $4,500 to say $3,200, then $4,500 which was our previous support could easily turn the new resistance.
This is a pretty solid strategy, but please carry out your research before you begin using it.
DISCLAIMER: This does not constitute financial advise. Endeavour to always do your own research before trying out any new strategy.