In this blog, I will help you guys learn how to find support and resistance by seeing charts easily.
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Supports and Resistance are very important part of cryptocurrency trading, it helps us see when is the right to buy and when is the best time to sell. But, before teaching you how to find them lets see what they are.
These are the price points/range where the price tends to bounce back up after falling down. At this sell the demand increases and buyers/bulls take charge(Usually at good support levels), you can also say that these are the points where the sellers are less willing to sell(the picture below will help you understand better.)
These are the price levels where the price fails to break through and falls down. These are usually those levels where the traders takes books there profits. A good resistance means high selling pressure(The image below will help you understand better).
How to find good Support and Resistance points?
Now the big question is how to find them. Generally, for basic level understanding, there are two types Support and Resistance
- Horizontal Support and Resistance: It generally includes those horizontal price level where the price either finds support or resistance(See the image for better )
If you see on the left side the price comes at a specific price level and than takes a bounce back up. Similarly on the right side if you see the price is getting rejected from a specific horizontal level and falls down. There is one thing which you must understand is that every time the price touches that horizontal Support or Resistance level the weaker it gets. Hence the chance of it breaking during the next price test increases(You can combine it with Fib indicator or better understanding).
2. Moving Averages(MA and EMA)
SMA: It stands for Simple Moving Average, a Simple Moving Average is a calculation used to analyze data points by creating a series of averages of different subsets of the full data set. It is simply the sum of the cryptocurrencies closing prices during a time period, divided by the number of observations for that period. For example, a 20-day SMA is just the sum of the closing prices for the past 20 trading days, divided by 20.
EMA: It stands for Exponential Moving Average, It is very similar to MA, a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes
Now, that you have learned about what SMA and EMA are now lets figure out which SMA and EMA to use will doing Technical Analysis of any crypto currency.
In the beginning you can start you way your way with 10,20,50,100,200 SMAs and EMA these are basic once and are available everywhere. Once you start getting to understand them, you will realize that on support the candle closes on/above the MAs but gives a wick below it (in the case of supports) and above it in case of resistance. So, what I noticed is 55 MA is pretty useful generally what happens is that the candle closes above 50 and gives a wick at 55 also, I have seen it being a major support and resistance in many cases. There are many more like this but for that you have to first understand the basics and then begin experimenting other MAs its quite fun and also helps in a lot of long and short trades.
Some Important things to understand while using SMA and EMA are:
- The greater the average interval the greater the support or resistance. Which means the 20 MA will be a weaker support/resistance as compared to 50 MA, Similarly the 200 MA will be stronger support/resistance than the 100 MA, So it will be difficult too break through it.
- If the SMA or EMA is above the price point it is considered as resistance and if it is below the trading price it is considered as support
- The greater the time interval, the greater the support or resistance. Which means if we have 100 MA in 4Hours time interval and 100 MA in 1 Day time interval as support the 100MA 1 day time interval will be we will a stronger support than 100 MA 4Hour time interval, and similar with the case of resistance.
- In shorter time intervals like 1min, 15min, 30 min I would not recommend using MAs that much patterns, horizontal support and resistance works magically well in these intervals, So I would recommend using them over MAs
- Always prefer larger MAs like 50,100,200 as supports in bear markets because of the high selling pressure.
- When you take a trade seeing these MAs always understand its a lagging indicator so it won't tell you much about the current market conditions. Hence use them carefully with proper knowledge of current market conditions.
- Similar to Horizontal Support and Resistance level if a particular MA is getting tested again and again it will get weaker and weaker. Hence increasing the chances of it getting broken and increasing the risk of the trade.
Fact- When the 200 MA cuts the 50MA, it’s known as the Death cross indicating bearish momentum. Similar when 50 MA cuts the 200 MA it is known as Golden Cross indicating Bullish divergence.
Not a financial Advice
So this is it for this blog, I hope you liked it.
I will make more such blogs on trading indicators(most probably MACD and RSI) to help you guys understand trading better. I am thinking of brings a series of blogs like this every week teaching about new indicators and trading technics.
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