Knowing how to set targets in crypto markets is one of the basic trading skills. The simplest method of doing this is by defining and then relying on the support and resistance areas. This a fairly basic trading concept, quite easy to use. If you are long in a trade, your targets should be set just before the price hits resistance. And the other way around, when you go short, you set your targets just before the support area. As simple as it sounds, it works more often than not.
There are different ways of finding support and resistance areas. The first one is to look at the price action and help yourself with the trend lines. You draw them by connecting the swing points (areas where the price changes direction, leaving behind a peak).
To set targets in crypto you can also use advanced tools such as the Fibonacci sequences or various indicators, most useful being Moving Averages, Ichimoku Cloud and Visible Range. It works best if you find confluence between the price action and one of these indicators (the basics of using indicators are explained in our previous blog). However, in this post I will be focusing on defining and using support and resistance areas that are based on price action alone.
Support and resistance basics
Support forms in the area where buying interest is significantly strong to overcome selling pressure. This is where a decline in price stops and reverses upward. Resistance, on the other hand, comes into play in the price range where selling pressure overcomes the buyers. Consequently, the price reverses downward.
Once either of these scenarios takes place, the areas of support and resistance are defined. Now there is a good chance that the next time when the price nears those areas, they will again make the price turn around – at least temporarily.
Support and resistance psychology
Let me explain how this happens. As everything in the market, it’s got to do with psychology.
Let us assume the market suddenly starts moving higher. When people see a certain asset going into an uptrend they want to enter a trade – but at a reasonably low price. Furthermore, many of those who sold just before the take-of also want to reenter – preferably around the price where they sold.
So, when the momentum weakens and price starts falling back, both of those groups of people will start entering. This will mean new buying power and the price stabilizing or taking off again. This is how support functions. A similar process is in play with resistance. If the price starts falling, people will want to exit their positions – but do this at a breakeven price. Others will see the area from which the price started to fall as a good place to open short trades. Consequently, the price will have a hard time to break above the resistance.
Support and resistance role reversals
One of the more interesting and less known roles of support and resistance in trading crypto markets is their reversal. When – as they say – support flips into resistance and vice versa.
This reversal of roles is very useful to set to targets. After a certain area of support gets breached (and the price falls lower) it will turn into a resistance. So, if a certain price area acted as support for a long time this means a lot of people went long there. However, if the price breaks bellow that area, this will make it a very strong resistance. Why?
People who bought in support now realize it was a mistake. They will want to exit, but at a break even or close to a break even price. The more people bought there, the stronger the sell pressure will be when we get near.
Also, this is a self-reinforcing prophecy. In markets where shorting is possible, people will open additional short in these areas. Expecting it will go down, they add further selling pressure.
One way of using support and resistance reversal is shown below. As you can see, your uptrend targets should be set on levels that once served as supports in a downtrend and will now act as resistance areas on its way up. You can expect some kind of a pause in price movement there and asses the situation; if it looks the price will continue, you may re-enter. If the price action is giving you signals of a trend reversal, you stay out of the trade.
Support and resistance in different trends
I already mentioned support and resistance in one of my previous blogs about recognizing and using trends for trading crypto markets. As mentioned, there are three types of trends: an uptrend, a downtrend and a sideways trend. How do they relate to the way one should set targets in crypto markets by using support and resistance?
When an asset is in a downtrend or an uptrend, a pause or a temporary reversal in the general price movement takes place. These reversals form successive higher (or lower) lows and highs. By connecting a series of these pivots, you can define support and resistance areas of a trend as diagonal lines. When price gets close to them you can reasonably expect the price to bounce in the opposite direction.
Setting targets in a defined range
In a sideways trend – or a so-called trendless trend – support and resistance are areas between which the price is moving. A sideways trend is easiest to trade using support and resistance because they tend to form a defined range. In a sideways trend support and resistance areas tend to be parallel to each other. However in the picture below the defined range can also be in other forms such as triangles.
Basically, you buy at support and sell or short-sell at resistance. If either of these areas gets substantially violated, you need to fast change the strategy. When support fails, you exit the position. In case resistance fails, you may think of entering a position. In the latter case, you may want to enter on a pullback – when resistance turns into support.
Strength of support and resistance
Support and resistance areas can be located on different timeframes. As a rule, the bigger the time frame on which a certain resistance was formed, the bigger its importance
The longer the time period during which trading is taking place in a certain area, the stronger it gets. For example, if trading in a certain sideways takes place for three months it gets stronger than if the price hangs there for only three days.
To guess the strength of support and resistance, the traded volume in that area is also very important. The more trading takes place in an area, the more important it gets and the stronger will it act as support or resistance. If you come back to an area where a huge amount of volume was traded before the take-of in either direction, this is very important.
A good example is bitcoin. The $6,000 area acted as support throughout the whole of 2018. Every time the price neared this area, huge buy volume kicked in. Consequently, it is very reasonable to expect that after the price went way below it, many people are waiting for the price to return there so they can abandon their positions with a minimum loss.
So, if you’ll be entering any long in the coming months of 2019, do remember to set your targets in crypto with this in mind.