Before you buy or sell cryptocurrency through an OTC, open a position on the futures market, or trade Bitcoin against another coin, you’ll want to develop a view on the market.
In other words, if you want to trade Bitcoin, you’ll have to determine whether you expect the price of Bitcoin to go up or down.
While there are many factors that influence a price movement, much of it comes down to support and resistance levels.
What is ‘support’?
Buyers will generally wait for the price of an asset to go down to a certain level before they buy. If the price of the asset goes up, but later on runs the risk of dropping below their initial buy in price, these buyers may want to defend the price and potentially add more to their positions.
Following the trend, new traders are likely to rally around this same price spot. This adds to buy pressure, creating a temporary floor known as support.
What is ‘resistance’?
Resistance is the opposite. When an asset is perceived as overvalued, sellers will want to take advantage and exit their position and take profit.
Of course, the movements of a price will not stay locked within the same barriers. Eventually, once the buying and selling efforts have been completely absorbed, there may be a breakout – this can cause a significant shift in market sentiment. We could see a price plummet or take flight.
How can you identify resistance and support levels?
Identifying resistance and support levels is part of technical analysis, and can be done in many ways. Here are some approaches:
Often, support and resistance levels form around significant price points – sometimes referred to as psychological price points. You can identify these price points through backtesting – i.e. looking at historical price movements.
Drawing horizontal lines at a price point that’s been hit by at least three candlesticks can also be helpful.
Fibonacci Retracement is another useful method by which to identify possible support and resistance levels. First, you’ll have to identity ‘swing highs’ and ‘swing lows’: a swing high is a candlestick at the top of an uptrend, flanked on either side by candles with lower lows and lower highs.
A swing low is, of course, the exact opposite.
Once you’ve marked the swing high and swing low points on a chart, you connect the two points and plot support levels based on the Fibonacci sequence of numbers, as shown in the graph below.