4 Ways To Use Support And Resistance Levels To Make Better Trades

Trading should be a straightforward process of buying low and selling high, but for many investors the process is similar to something more profound. One of the most basic and easiest to understand strategies that can help with this is to identify the support and resistance levels of an asset.

Once traders can see support and resistance levels, they can improve their entry and exit times in the market. Support and resistance are also very useful in bull, bear and range markets.

Take a moment to understand these basics.

What is support

Support is formed at a level where buyers ‘demand absorbs sellers’ supply and prevents the price from falling further. At this level, bullish traders buy because they believe the price is attractive enough and may not go any further.

On the flip side, the bears stop selling because they believe the market has fallen enough and is likely to rebound. When these two situations arise, a prop is formed.

EOS / USDT daily chart | Source: TradingView

The graph above is a good example of a strong support zone. Every time the EOS price drops to $ 2.33, buyers pop up and sales drop. This leads to the fact that demand exceeds supply and prices rise again.

While horizontal planes are considered more reliable, they are not the only way to create support planes. During an uptrend, the trendline also acts as a support.

LTC / USDT daily chart | Source: TradingView

Litecoin (LTC) began its bull cycle in December 2020. The price has rallied from the trendline several times since then. It does this because the bulls believe that the LTC / USDT pair has reached an attractive buy level when the price is near the trendline.

At the same time, traders trading in the opposite direction stopped selling, claiming the asset was oversold in the short term. Both happen at the same time, which ends the correction and resumes the upward trend.

What is resistance?

Resistance is the opposite of support as it is the level at which supply exceeds demand, preventing upward momentum.

Resistance arises when buyers who bought at lower levels take profits and aggressive bears start short selling as they believe the rally is exhausted and ready to retreat. If supply exceeds demand, the rally will flatten and reverse.

BTC / USDT daily chart | Source: TradingView

Support or resistance doesn’t have to be a single level. The graph above shows that the $ 10,500 to $ 11,000 zone of Bitcoin has acted as a resistance area. Whenever the price hit this zone, short-term traders made gains and the bears started selling the BTC / USDT pair. From August 2019 to July 2020, the pair was rejected 5 times by this area of ​​resistance.

Similar to support, lines or areas of resistance are not necessarily always horizontal.

ETH / USDT daily chart | Source: TradingView

During the decline from May 6, 2018 to July 4, 2018, Ether (ETH) rose to the resistance level, also known as the downtrend line, but was rejected and rejected on the downside. This is because traders with a bearish outlook took advantage of rallies to open new short positions when they thought the price would fall to lower levels.

At the same time, the bulls, actively buying on a sharp decline, closed their positions near the resistance line. Hence, this line acted as a wall and the price has fallen since then.

Identify support and resistance during periods of consolidation

EOS / USDT daily chart | Source: TradingView

When support and resistance are well defined, as in the EOS / USD pair above, traders can buy when price bounces off support and wait for price to recover near resistance to close the position. The stop loss for this trade can be kept just below the range support.

Sometimes professional traders can try to chase these stops by pulling the price below the range’s support. Therefore, traders should wait for the price to rise again before buying, and also wait for the price to close well below the support before closing the position.

Trading in sugar Upward trend

When an asset is backed by a triple uptrend line, traders can expect the line to hold. Hence, long positions can be taken when the price bounces off the uptrend line. The stops for this trade can be kept just below the trend line.

In an uptrend, however, a break below the trendline does not necessarily mean that the trend has reversed. Often times the trend just pauses before it continues again.

ETH / USDT daily chart | Source: TradingView

As can be seen in the graph above, the ETH / USDT pair has received support from the uptrend line several times. However, if the pair breaks below the uptrend line, no new downtrend will begin. The price consolidated in a range for several days before resuming the upward momentum.

Traders can close their long positions when the price falls and stays below the uptrend line, but should avoid new short positions. When price resumes its upward trend after consolidation, traders can again look for buying opportunities.

Turn resistance into support

If the price breaks above resistance, the bulls will attempt to convert previous resistance to support. When that happens, a new uptrend will begin or continue. If this happens many times, it can be good buying opportunities.

BTC / USDT daily chart | Source: TradingView

Bitcoin was stuck between the $ 10,500 to $ 11,000 zone from August 2019 to July 2020. This offers traders a good buying opportunity as the uptrend is just beginning.

Convert support into resistance

DOT / USDT daily chart | Source: TradingView

The above Polkadot (DOT) chart shows how the $ 26.50 to $ 28.90 zone acted as the support zone from February 14th to May 18th this year. However, once the bears pull the price below the support area, the zone turns into resistance and has not let the price rise above it since. This is an example where support becomes resistance.

Important things

When analyzing a coin, traders need to look for levels of support and resistance as these can serve as good entry and exit points.

In an uptrend, traders should buy when there is support and in a downtrend, traders should sell when resistance.

Support and resistance levels are not fixed price levels but a range of prices and professional traders will try to chase stop loss. Therefore, traders should wait for the price to react before entering and wait for the price to close well above (below) the resistance (support) before exiting their position.

SN_Nour

According to Cointelegraph

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