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How to use trendlines, support, and resistance for crypto technical analysis

by | Jun 15, 2018

The goal of this article is to help you understand trend lines, support, and resistance, and how they can help you to become a better trader. Entering trades on support levels and taking profits at resistance levels will help protect and increase your capital over time. We will cover what constitutes a trend line, and how to draw them. We will also look at how to identify support and resistance zones and what makes some better or worse. The purpose of this article is strictly educational.

How to use support and resistance levels for crypto technical analysis

To understand support and resistance, let us talk about the psychology of the market related to supply and demand. Supply is the amount of a product available and demand is the desire for that product. At a support zone, the demand for the product at that price is greater than the supply – causing the price to go higher. Meanwhile, when the market agrees that the price for an asset is too high, the supply is greater than the demand causing the price to be rejected at that resistance and to decrease in price. In the photo below, you can see how the price of ethereum and bitcoin bounce back and forth until the market can determine the price level.

The purpose of finding support and resistance zones is that they will help manage your risk. You will have more favorable risk to reward ratios when you enter and exit upon these levels.

One of the most important concepts with support and resistance levels is that once they are breached and retested they morph into the other. When a support is broken, it often becomes a resistance and vice versa. Imagine a bunch of people investing at a support zone, and then the price falls lower.  Because market investors do not want to lose their money they sell back at a break-even price making the resistance difficult to cross. When a resistance is broken, it then becomes a support. Because investors had already seen higher prices, they buy when the price goes back down thinking they are getting a cheap bargain.

How to use trendlines when trading cryptocurrency

Trendlines are used to show tendency and direction in price action. Trendlines are a form of support and resistance and you should use them to help you determine entry and exit points for trades. They are a smooth indication of the price direction. You draw a trendline by connecting the high points or low points of a candlestick. When dealing with cryptocurrency I think you absolutely have to draw from wick to wick. Whales know there is a lot of market liquidity above and below candle closes. If you don’t use the wicks, your stop might be the wick. Don’t be the wick. Remember 3 touches makes a valid trendline, while 2 touches is a predictive one.

Below is a major trend line of Ethereum. Notice if you were to place your buy orders on it you would have made a profit.

How did we draw it? I use the ray tool and connect my first two trend points. In this case, they were the tops of candle wicks. The ray will create a trendline that extends well into the future. These are your resistance points. You sold when price reached that point. Then on the third attempt, our candle closed above the trend line signaling you to go long.

Notice what happened when the price crashed.  We found support exactly on that trendline. As I mentioned earlier when a support or resistance is broken it then becomes the opposite. Look at the yellow highlighted ovals in the image below.

This also works in a downtrend. Place your sell orders at your support that turned into a resistance.

There are several elements that make a trendline better or more reliable than others. The volatility coming off the trendline, using a larger time frame (4hr and greater), a high number of touches, and, most importantly, whether it has been used as both a support and resistance. Remember that trend lines are just one form of a support and resistance.

RSI and Fibonacci indicators are other great ways to find support and resistance targets. You can also use whole numbers.  Remember how painful it was for BTC to fall below $10,000?

Support and resistance are great ways to help you minimize your risk. As hard as it may be to enter and exit at these levels due to emotions, it will help you minimize the emotional roller coaster of getting in on a trade in the middle. It will also prevent you from overtrading.

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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