Supply and demand
In our last lesson we have explained what accumulation and distribution is in the market. In this lesson we will have a look at the support and resistance levels.
To analyze and understand trends and price movements traders are using specific levels to determine where is are the buyers (demand) and where are the sellers (supply) of a certain asset. If there are a more sellers then buyers it pushes the price down and if there are more buyers then sellers it pushed the price up, simple as that.
Those levels we call support and resistance levels and are one of the most important indicators for trading and especially day trading bitcoin and cryptocurrency. Because those levels are going to be a part of the decision making of where to enter a position and where to sell.
Support is when a price level is respected and that is has shown significance in the past and that we don’t expect the price to fall below that level. We expect to see buying support around the support level. Let’s have a look at the 4 hourly Bitcoin chart.
The yellow line represents a support line. In the past we have seen multiple touches with this level and every time the price range is touching this level buyers are stepping in which means we have buying support around that level.
Support levels are also very psychological levels for traders to decide when to buy Bitcoin. When the support line is broken the market psychology is changing and new levels of support and resistance will be created.
Resistance lines are representing the opposite from support lines. A resistance level is a price level that have shown significance in the past and often a target for traders to sell their Bitcoin or cryptocurrency. We expect traders to sell their assets when the price is reaching the resistances level.
The red line represents the resistance level. The price has touched this level multiple times and is bouncing back after it touched. That indicates that the sellers (bears) are having more power then the buyers (bulls).
Same as support levels resistance levels are psychological levels for traders to decide when to sell Bitcoin. Once the resistance line is broken through the market psychology will change and will create a new resistance level.
Support and Resistance zones (shadows)
Support and resistance zones are less specific and therefor subjective but still can act as a good indicator. In the following chart you will see the support (orange) and resistance (red) zones of Bitcoin.
Support and resistance lines and zones both function as a indicator of where to buy and where to sell. It is up to you if you like to set zones or lines as support and resistance.
Wedges, trends, flags and so on
Support and resistance levels are not restricted to tops and bottoms of candle sticks but can also be set at wedges, trend lines, bull flags and so on. In the following chart you see a downtrend in Bitcoin having a clear support and resistance line.
The red line represents the resistance line and the green line the support line. So an example of a simple trade strategy here would be to buy when the price touches the green line and sell when touches the red line.
Tip : It is often better to sell before it is reaching the resistance line as a lot of traders are looking at those levels to sell. It is better to gain smaller profits and sell before it is touching the resistance level.