When trading cryptocurrency, traders are guided by special indicators that are highly likely to predict the movement of an asset's price. How to learn to use such tools effectively
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The most basic technical indicators that traders use to analyze charts are support and resistance levels. These are the zones where the confrontation between sellers and buyers took place most often. Topplabs.org experts explained how to properly use these indicators in practice.
In simple words
A support level is a zone, upon reaching which the asset price reverses from bottom to top. This level supports the value of the asset, preventing it from dropping below.
The resistance level is called the zone, upon reaching which the asset price reverses from top to bottom. Resistance prevents the price from going up any more.
When working with support and resistance levels, it is important to remember that the price level is not a clear round number, but a range, noted Mikhail Karkhalev, financial analyst at Currency.com cryptoexchange. According to him, these indicators are considered key for traders, since they reflect well the marks, upon breakdown of which in 90% of cases, it is possible to determine the further direction of price movement.
“When these levels are broken through, strong price movements occur, since pending buy or sell orders, as well as take profits and stop losses, are located near these levels,” the analyst explained.
How to determine levels
The support and resistance zones on the chart look like places where local trend reversals most often occurred, explained Maria Stankevich, Development Director of the EXMO crypto exchange. Testing support and resistance levels usually look like a long tail bar at low volumes, she said.
“The point itself is not a“ level ”, and therefore, one can speak of stable support / resistance only if the chart hits the“ channel ”price several times,” the expert noted.
If the price of an asset broke through the historic maximum the day before, then it is not possible to accurately determine the next resistance level, added Karkhalev.
Trading strategy at levels
Making trades with an orientation to support and resistance levels is called trading on rebounds within the channel, Stankevich said. She explained that this strategy works as follows:
- The key support level is highlighted, which was not broken by the "bears" at least three times;
- From this, we can assume that the next time it reaches the support level, the price will bounce up again;
- When approaching support, an asset is purchased with a stop loss (calculated taking into account the acceptable level of risk);
- After the price rebound, the trade is closed at a comfortable level for the trader;
- The ideal option would be to hold the position until the price approaches the resistance level and close the trade before the next bounce.
If the forecast turned out to be incorrect and the support level was broken, then in such a situation it is better to immediately fix the loss and determine new entry ranges, Stankevich advises.