One of the characteristics that are found common to all of the existing cryptocurrency members is the inherent price volatility in their markets. This is not surprising, because there are regular activities occurring every day, which involves the use of these relatively new financial instruments.
Some of the factors affecting price volatility are the rise and fall in crypto demand and supply (whether they be sharp or gradual), rates of inter-currency exchange, government threats and planned policy implementation, levels of cryptocurrency acceptance and adoption, nature of dispersed news and feedback, amongst other contributing factors. To a large extent, many of these factors are independent, and there’s almost nothing that can be done to bring them to a limit, except a reversal of the contributing factor- which cannot be particularly determined by anyone.
Drawing similarities between the popular foreign exchange market and the cryptocurrency market as a whole, it is obvious that one of the few properties that are peculiar to both markets is the volatility tendencies. Just as the main subject of an exploit in the forex market is the volatility ratio, so also, is it obtainable in the cryptocurrency exchange market. However, there is the clear-cut difference in the amount of volatility that happens, or that can be expected over time. While foreign exchange currency price pairs are estimated to vary by 0.5 to 1.2% over a pretty lengthy period, a high 5 to 25% is expected for cryptocurrency pairs in only a short period. This brings us to a lot of deduction and conclusions as to the prospects or risks that are present in cryptocurrency trading.
The place of concern for users and investors in the virtual currency world is how to immune themselves from debilitating losses, as well as methods of leveraging on this trend. Using the approach of forex trade on the digital currency market can bring lucrative results for the careful investor- who is not unnecessarily careful.
The way to go is the use of technical analysis tools known as support and resistance. Making use of support and resistance mechanisms can help put an effective gauge or indicator that gives an idea as to how the market looks like, at every point in time.
But before we can understand how this mechanism becomes effective, we must understand the concept of it; what they mean.
What are support and resistance?
In financial market situations, there is the need to have some kind of information that pertains to how the direction of price fluctuation and stability is achieved. The total of this and all the other elements involved refers to what is known as technical analysis. There are several technical analysis tools that have been invented and put to use since currency market forecasting began. As of today, support and resistance are one of the most used.
Support in cryptocurrency refers to a price range within which the particular cryptocurrency price, seem to have reached the bearable lowest, and at which a lot of users and investors are willing to buy more of the coins or tokens because they find it to have come rather low than its supposed real value. It can also be referred to as the zone of support where the crypto tends to regain increase in price after a series of initial decline. As much as a support position exists, it is relative for different persons. Thus, we can infer, and this is true, that the support mark is not a fixed price value, but rather, a range of values with some proximity.
Also, there could be several support positions in the overall price value for a cryptocurrency. What this means is that usually there are other support points that have existed over time, if we take the history data into consideration. So it is most likely that during the cause of price appreciation, the initial support has been overtaken by new support with a higher value. If in the future, prices break down below the new support, it is possible that the new solace would be found in the older support.
We can make a good explanation using bitcoin for example. Since the use of the cryptocurrency started, it has experienced several price changes which in essence means different support (and resistance), at different times. In late November 2017, when the price of bitcoin first rose to $10,000 and a little over, support level for the cryptocurrency seemed to have stayed at about $7,600 for the next two months. Although there were incessant price fluctuations, it did not seem that the coin price would go any lesser than the support. In December, when prices rose to $20,000, new support seemed to have been established at $9,000, although it did not remain valid for a long time before prices broke further down.
The reason why there’s usually a bounce back in price once the support level is not broken is the fact that since more people are buying (supporting) the cryptocurrency at that price, it gets to a point where the price begins to spring back up when the demand has considerably risen.
Resistance, on the other hand, refers to a level at which price rise for a cryptocurrency is cautioned or prevented, hence the term resistance. This means that there are certain price points where there seems to be a pushback, and then a consequent decline in the price of the coins.
Just like the support zone, a resistance level does not mean there can’t necessarily be a break beyond that point. If the rise in price can jump considerably up, then it means the initial resistance mark fails to remain such. An implication of a price break, off the resistant mark is the possibility of the resistance mark becoming a support level instead. At the point where bitcoin prices experienced enormous hikes, previous resistance level was converted to supports. For instance, bitcoin resistance as at January 2017 was placed at about $1,000, which was an impressive value at that time, until its resistance jumped to over $4,000 as at early August. During this time, the resistance of a thousand bucks became more of a support range. When the crypto price projects further off the resistance, it could be an indication of booming demand, and hence a good omen for the coin. Resistance takes the same methods as support, except that it is an opposite of it. While support is some kind of caution for price fall, resistance is some kind of caution for rising in price. At the resistance level, many investors and traders find it most profitable to trade off some of their currency assets. This is because prices have moved high, and it is likely that the traders had bought their assets when the prices were lower.
Investors have relied on these price signaling index as a way of determining when to opt in or out of active investments. Although the use of support and resistance in cryptocurrency trading is relatively new, it follows the same methods as it is used in the fiat currency forex trade.
When predicting active support and resistance levels, it is important to note that there are times when it seems either of the support or resistance has been broken, but it’s not so. This happens when either of the levels is passed, but after which they are reverted to. This is referred to as a ‘testing' of those levels. It is also important not to be hasty about deciding until it becomes certain that the levels are no longer valid for that time. This information is useful for investors and traders who actively utilize these tools for their everyday investment activities.
Now, asides a knowledge of what these indicators are, the big information lies in understanding how to leverage on them for profit optimization in cryptocurrency trading.
How to trade support and resistance
When trading using support and resistance, a basic initial requirement is to study how the market prices move. This would enable the investor adequately and correctly mark out the support and resistance levels. It is not advisable that you start trading cryptocurrencies using this analysis technique if you’ve not been familiar with the markets over time. We will dive more in-depth into the topics via case studies probably in the near future, so stay tuned.
The Cryptotrading 101 Series
- Cryptotrading 101: Types of Market Analysis
- Cryptotrading 101 : Types Of Chart & How To Read Them
- Cryptotrading 101 : Types of Trading Styles
- Cryptotrading 101 : Support and Resistance
- Cryptotrading 101 : Trendlines & Channels ( Coming Soon )
- Cryptotrading 101: Candlesticks Pattern ( Coming Soon )