In recent days stock markets around the world have rallied more than anyone would have expected. Were small signs of relief enough to trigger FOMO? Are the bulls back? We won’t know for sure, but we’re certainly still far from the end of this crisis, where central banks are releasing new rescue packages with staggering numbers on a daily basis and unemployment is reaching unthinkable highs.
As a reaction to the worldwide money printing, some people like the author of “Rich Daddy Poor Daddy” have pointed out that you should use your money to rather buy gold, silver or bitcoin since these assets won’t be losing their value as much. So let’s have a look at bitcoin’s recent performance.
Just a few days ago, bitcoin was still testing a price above $7400. However, at the time of writing, we are back at slightly below $7000 where the price is lingering. There seem to be some areas where bitcoin just can’t move past a certain mark, be it below or above. Traders call these areas support and resistance.
Support is an area where the price of an asset stops falling, where traders are willing to buy again. Resistance is the opposite: the area where the price of an asset stops rising because demand and supply are somewhat in equilibrium. One way you can identify resistance or support levels is by using a horizontal line. Simply find a price point in the recent past where the price struggled to break above or below and draw a horizontal line from it to the right. Once the price approaches that line again, it’s likely to recover and increase again. To draw a horizontal line, simply go on the horizontal line icon on the left of the price chart and choose simple line.
The same vice versa applies to resistance. Traditionally, support or resistance is considered significant after three price-touches. However, just one simple horizontal line won’t necessarily show the full picture. It won’t be of much help to identify trends where you can observe higher highs and higher lows making the horizontal support line less useful.
For such purpose, traders rely on trendlines which indicate levels of support and resistance in upward and downward price trends. You can find them by connecting trend peaks and valleys on a chart. When the price breaks through a support line, this is a bullish sign while prices breaking the resistance is considered bullish.
Yet, not all support and resistance levels are the same. Some are easier broken and merely serve to provide analytical insights and short term trading opportunities. Resistance or support is considered major if at those levels previously trend changes have occurred.
One more tool frequently used by traders to spot different levels of support and resistance is the so-called “Fibonacci retracement”. If you feel like you’ve heard of Fibonacci before, you might have encountered the “golden mean” and the Fibonacci numbers before. Fibonacci was an Italian mathematician who introduced a powerful sequence of numbers in the 13th century: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89.
If you wonder what’s so special about this sequence, first of all, each number is the sum of the two preceding numbers. Secondly, each number is roughly 61.8% of the next number, 38.2% of the following number, and approximately 23.6% of the number after that. Lastly, every number is approximately 1.618 times greater than the preceding number. This number is known as the “golden mean”.
The Fibonacci sequence has been found to be prevalent in nature in spiral shells, yet some believe that its influence extends far beyond shells all the way up to human behaviour. In practice, this would mean that humans stop or reverse a trend at Fibonacci levels. Say, you’ve $1000 then you would start spending less or stop entirely after spending $618.
For trading, Fibonacci levels are calculated by defining 2 extreme points (major high and low) and then dividing the distance by the Fibonacci levels: 23.6%, 38.2%, 50%, 61.8%, and 100%. Luckily you don’t have to do the math yourself even though, I am confident that you could. To draw in Fibonacci levels in the price chart, go on the icon bar at the right side of the chart and hover over the icon that looks like a fork. A menu will open and if you scroll down, you’ll find Fibonacci retracement. Click it and then you just have to pick a major high and a major low and the levels will automatically be added.
So what now?
You’ve understood support and resistance and now?
You can use your knowledge about support and resistance to inform and guide your trades. In an uptrend, you’d want to buy close to support levels and then sell near resistance. Yet, as always there is no assurance that these levels will hold. Before buying directly once a price has reached support area, wait for some confirmation by the market if the levels still hold. You wouldn’t want to buy at support just to see the price then go down even more.
If you’re advanced, you can also wait for consolidation near a resistance area (and if you’re confident in yourself and the price going down further) enter a short trade as soon as the price drops below the small consolidation.
Shorting something means that you borrow a certain asset — let’s say Bitcoin — and immediately sell it to someone else. For instance, if you believe bitcoin will drop to $4800 and it’s currently at a minor resistance area around $5600 you would borrow bitcoin at that price and hope that you can buy it back later for $4800. It’s a pretty risky thing to do so, be sure to practice proper risk management.
One final word of caution, like all indicators, Support and Resistance are a great way to start, but better used in conjunction with other indicators as well as general research about the assets you’re trading with. When trading cryptocurrency one major benefit is that all transactions and wallets are recorded publicly (with exception of privacy coins) which allows for in-depth on-chain analysis. For instance, you can find out how many holders are making money at the current price and how long people are in general holding a certain currency. This information can support your future trading decisions.