- 27th August 2018
- Posted by: emy
- Category: Media
If you’re following the crypto markets, and especially if you’re trading, you’ll probably here the words ‘support’ and ‘resistance’ used a lot. If you’re new to the scene, you may be wondering exactly what is being talked about, so here’s s brief guide to both these terms.
One way to illustrate it simply is to imagine bouncing a ball indoors. There are two barriers – the floor and the ceiling. Traders face similar barriers that limit price movements – one is support, the other resistance.
If a crypto asset is seen as being undervalued, people will keep buying it at that price. This continues until the demand is fully absorbed by the market. So, if buyers engage at X price and the price moves upward only to later return to that level, the same buyers will look to defend their positions at X and potentially add more to their positions. Also, new buyers will see that the price at X has held, and this encourages them to start buying. More buying prevents the price from falling below X, creating a ‘floor’, which is known as ‘support’.
This is the opposite of support. If a crypto asset is perceived as overvalued at X level, people with large amounts of the asset will start exiting their position by selling their assets t take the profit. There will also be buyers who will take ‘short’ positions at this point and alongside the over-valuation, the pressure on everyone to sell is increased.
What else do I need to know?
Price trends will typically pause when faced with either support or resistance lines. This is due to the concentration of buying or selling pressure that is about to follow. While the levels can act as a barrier to price action for a lengthy period, they don’t last forever, as the market will eventually absorb them.
Once this occurs, we usually see support convert to resistance and vice-versa.
Basically, support and resistance levels help identify areas of strong supply and demand. So, identifying major supports and resistances is considered by many to be one of the most important aspects of successful trading.