It’s important to hone your technical analysis skills because the crypto markets are known to be volatile. Prices are subject to change at any moment and without having an understanding of the markets, you could risk losing money.
Another essential point to note is that all trading is conducted through speculation; there is no definitive prediction. If one trader believes Bitcoin’s price will rise while another believes it will drop; neither are correct until the price moves one way or the other. Always keep this in mind.
In this guide, we cover the basics of support, resistance and moving averages to help you improve your crypto trading skills.
Important crypto trading terminology
Support and resistance
To help conceptualise support and resistance lines, think of supply and demand. Supply refers to the amount of a product available on the market, whereas demand refers to how much of the product is desired.
At the support zone, the demand for a digital asset (i.e. Bitcoin) at that price is greater than the supply. This drives the price upwards.
The resistance line can be determined when the market is in agreement that a price for a digital asset is too high. Naturally, the price will drop at this point. This is because the supply is greater than the demand. In a sense, the market is rejecting the price at the resistance line.
At the resistance point, the price will not go any higher – potentially indicating a good time to sell. However, the support line can also indicate a good opportunity to buy. The important thing to remember here is that prices typically won’t continue to rise at the resistance point, so buying then is traditionally a bad move.
The purpose of support and resistance lines is to help you mitigate against a loss. You have better risk-to-reward ratios if you enter and exit the market at these critical points.
If the support and resistance lines are retested, they are liable to morph into the other. Once again this isn’t necessarily absolute, but it does happen a lot. When support is broken, it will often transform into the new resistance line and vice versa. If investors entered the market at the support zone and then the price falls, they don’t want to lose their money. So, they sell back at a break-even price which makes the resistance line hard to cross.
When the resistance line is broken, it becomes the support line. This is because the investors have already seen higher prices. For them, they will buy at a lower point because they will see it as a bargain.
It can be difficult to estimate a cryptocurrency’s overall trend. This is when moving averages can become a useful tool for traders. In effect, a moving average is a ‘trading signal.’ Moving averages can assist you in breaking down the momentum of token. Typically, a moving average is represented by a line which portrays an indication on where a tokens price was, and where it could end up.
A simple moving average is often represented by a line that illustrates the closing price of token, averaged over a period of time. An example of this could be if you note the closing prices for the last 30 days, add them up and then divide that total by 30. You will be left with the average of that set of numbers. A lot of moving averages are determined by 50, 100 and 200 day periods. Naturally, 50 is a short term moving average, 100 is medium and 200 is a long term moving average. If you are looking to make a long term investment, you might be better to assess a 200 day moving average to gauge long-term trends.
A simple moving average does not come without issues. If a price is significantly out of range in comparison to the other price points, the average could be skewered. Historically speaking, the more times a moving average is tested, the stronger the support/resistance can be.
A quick note
As always, crypto trading carries substantial risk and you should always do your own research and be confident in the decisions you make. Try to avoid giving into the fear of missing out – otherwise known as FOMO – since this can encourage you to act emotionally, rather than rationally.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.