What is support and resistance in cryptocurrency trading?
Imagine bouncing a ball inside your house. There are two barriers that will limit her flight and fall – the floor and the ceiling. In cryptocurrency day trading, there are similar locks that limit the movement of price action, known as support and resistance.
Support: Buyers will generally continue to purchase at a specific price, given the asset is perceived as undervalued, until all demand is fully absorbed by the market. Therefore, if buyers engage at price X and the value rises only to return later, they will look to defend their positions at X, creating a temporary bottom known as support.
Resistance: If an asset is perceived to be overvalued at a certain price level, sellers will certainly take advantage. Large buyers from before will look to exit their position and take profit, increasing market selling pressure. This concentration of selling pressure will force the price level to act as a barrier, known as resistance.
Horizontal support and resistance: The most important and easiest to identify levels take the form of horizontal lines, resulting from a trend being rejected repeatedly at a very similar price. Horizontal lines of support or resistance can be created by connecting the points between the peaks or troughs of the trend.
Polarity: When these levels are eventually surpassed, a major shift in sentiment, known as polarity, can occur. When the selling behind a resistance level is fully absorbed, it is seen as a good entry point for buyers, turning the resistance into support. Likewise, when the buying pressure behind a support level is fully absorbed, it turns into resistance.
Trends tend to move when coming into contact with support or resistance lines due to the concentration of buying or selling pressure.
