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Support and resistance levels in technical analysis are two key concepts to understand the behavior of Qumt in the cryptocurrency market. It is very important to recognize support and resistance points when supply and demand meet. Teaching support and resistance levels to determine market psychology and supply and demand is one of the important principles in technical analysis. Support is a point on the price chart where the price stops falling further due to increased demand.
At this point, buyers are more willing to buy because of preventing the price from falling. This is while at the resistance point, the price prevents further increase due to the increase in supply and sellers will be more willing to sell.
When the price crosses the valid support and resistance level, the idea is about the movement of supply and demand that created these levels. Therefore, new levels of support and resistance are likely to be created. In the rest of this article, I am going to explain to you the concept of support and resistance lines of digital currency (Support and Resistance) in technical analysis.
What is support and resistance?
The support level is actually a price level where the demand is likely to increase enough to prevent the currency price from falling further. Once the price trend line reaches the support level, it will be difficult to cross it; Because when price approaches support, buyers are expected to be willing to buy more and sellers are expected to be less willing to sell.
Based on this belief, when the price reaches the level of support, the demand will exceed the supply, and this will prevent the price from falling below the support. Of course, it is important to note that the support level is likely to be broken and these levels are not definitive or permanent.
On the other hand, at the resistance level, it is a level of the price at which the supply reaches a level that prevents the price from increasing further. As the trend line approaches the resistance level, the price will hardly go up and the sellers will be more willing to sell and the buyers will be less.
When the price approaches the resistance level, increasing the supply compared to the demand prevents the price from rising above the resistance level. Of course, these levels are not as certain as the support levels and are likely to be broken.
What is a simpler expression in response to this question of support and resistance? In this way, it can be said that the support level is a range of the price of a cryptocurrency that prevents the price from falling in a downward trend and the resistance level in an upward trend prevents the price of the cryptocurrency from increasing further.
The effect of supply and demand in identifying support and resistance points
Supply and demand are one of the important and fundamental concepts in financial markets, which are discussed in the training of technical analysis. Support and resistance levels are directly related to supply and demand. According to the law of financial markets, the price of a cryptocurrency increases when there are more buyers than sellers or demand increases compared to supply.
Therefore, the price decreases when the sellers outnumber the buyers, and this means that the supply exceeds the demand. Based on this, it can be concluded that increasing demand in support levels and increasing supply in resistance levels prevent the current price movement. The more times the support and resistance levels can prevent the price trend, the more reliable and strong levels will be formed.
When the price approaches the support lines in a downward trend, the probability of correctly performing the task of this level is higher than if the price breaks the support level without reaction and crosses it.
But if it breaks it, it will go down to near the next support level. This is also true in an uptrend, and as the price increases and approaches the resistance level, the price is more likely to stop than to cross and break the level. But if the price breaks the resistance level and rises above it, this movement will continue until reaching the next resistance level.
What is important in support and resistance levels are the different modes of price behavior when dealing with support and resistance levels. If the price changes its direction quickly when it meets the support and resistance levels, it will actually be considered a simple test of these levels.
But if the price after entering a support and resistance level remains in that range for some time, it is more likely that the price will continue its previous trend and approach the next support and resistance level.
The reason for the formation of support and resistance levels
Support and resistance levels in technical analysis arise based on various factors, which are divided into three categories below:
Market psychology
expectations: Expectations and predictions of traders regarding the future trend of the price is one of the influencing factors on the levels of support and resistance.
Reference points: Traders consider past price levels as reference points and buy and sell at those levels.
herd effect: Traders tend to follow the behavior of other traders and this issue has an impact on support and resistance levels.
technical analysis
Trend lines: Trend lines can function as support and resistance levels.
Support and resistance indicator: Some technical indicators such as stochastic, MACD and RSI can indicate support and resistance levels.
Moving Average: Moving averages can function as support or resistance levels.
Fundamental factors
Supply and demand: At the points where supply and demand balance, support and resistance levels will be formed.
psychological factors: Factors such as greed, fear and optimism will affect traders’ behavior and then support and resistance levels.
News and information: News related to the market, such as the performance of companies and economic reports, affect supply and demand, and then support and resistance levels.
Types of support and resistance levels
To recognize support and resistance points, one should first be familiar with its types. These levels are defined with the help of wave and trend concepts from a simple point of view that the highest price of a moving wave or trend is the resistance level and the lowest price of the wave or trend is called the support level.
Support and resistance obtained from moving waves, such as Elliott waves, are called secondary and secondary resistance and support, as well as main resistance and support obtained from the movement process.
horizontal surfaces
Horizontal levels are straight lines that connect price points. It is very easy to identify support and resistance points from horizontal levels. They can also form at rand price levels or points where the price has reacted in the past.
In these levels, the highest and lowest points are at the same level, and by connecting the highest points, the horizontal resistance line and the lowest points create the horizontal support line.
miles
Equivalent points are connected by positive and negative sloping lines.
regional
Regional lines with a specific price range function as support or resistance levels.
Valid support and resistance psychology
The amount of trading at support and resistance levels is determined by three methods:
The length of time the price remains at that level
The longer the price stays at a Support and Resistance level, the more valid that level will be. For example, if trading is done in a straight and neutral trend for three weeks and then the price starts to rise, that area becomes more important as a support level than if only three days of trading are done there.
Turnover
In the technical analysis of trading volume, another method is valid for determining support and resistance. A support level with high trading volume represents a larger number of buyers and will make the support more important than when less trading volume has occurred. To check these levels, dot and figure charts that show daily price activity; They are useful.
How recent transactions are done
The third way to identify valid support and resistance is to examine how recent trades have played out. Considering that we are often dealing with traders’ reactions to market movements and their stance on buying and selling, the more their movements increase, the more potential they give to Support and Resistance levels. In fact, due to the increase in the price, the investors’ reaction caused new purchases in every downward trend and price increase again.
How do traders use support and resistance levels?
Traders use Support and Resistance to identify zones in the price chart. Zones are actually levels where the probability of stopping and returning in the trend is higher. Investors and traders enter or exit the market based on the price levels that they witnessed trading activity in the past.
Support and resistance levels are important concepts for financial risk management. The ability to identify support and resistance points leads to the possibility of providing favorable business opportunities. Entering a trade close to the resistance level is likely to be a profitable strategy.
Meaning of rand numbers in support and resistance levels
One of the common features of Support and Resistance is that the price movement of an asset exceeds a Rand number such as $50 or $100 per share. Most inexperienced traders tend to buy and sell assets when the price of a stock or currency is at a whole number.
Also, most of the stop or target order prices specified by large investment banks or retail investors have rand prices instead of prices such as 50.07.
Considering that most of the orders are at the same level, Rand numbers are powerful price barriers. In the event that all customers of a bank place sell orders at a price such as $55, a large number of buyers are needed to attract these sales, and therefore a level of resistance will arise.
Shifting the role of resistance and support
In technical analysis, when the price crosses the resistance or support level, the role of these levels can change. For example, if the price crosses the support level and goes lower, the support level will become a resistance level, and if the price rises above the resistance level, most of the time, the resistance will be converted into a support level. In fact, when the price crosses one of the Support and Resistance levels, the supply and demand shifts.
The reason for the formation of these points is related to the share value. For example, at a resistance level, buyers may conclude that the price will not exceed this level. So they sell it. Basically, Support and Resistance levels are rand numbers.
Supply and demand are very important in Support and Resistance of prices, which we discussed in the text above.
Helping with a better strategy, identifying market trends, finding market entry and exit points, and risk management are some of the benefits that help traders.