Support Level

A support level in crypto is when the price of a crypto asset stops depreciating because of increased supply from buyers that wish to buy at a certain price.


What Is a Support Level in Crypto?

A support level in crypto is when the price of a crypto asset stops depreciating because of increased supply from buyers that wish to buy at a certain price. Support levels in crypto can be both short-lived and long-term levels. Factors influencing these levels are the market sentiment towards the asset, whether the overall market is bullish or bearish, and daily factors like news. 

In technical analysis, a support level is visualized by drawing a line along the lowest lows in a certain time frame. Depending on the interpretation of the analyst, the line can be flat or slanted. There are also more advanced models of support levels using moving averages, Bollinger bands and other technical indicators. 

How to Use Support Levels in Crypto?

Support and resistance levels in crypto are crucial to the art of technical analysis. Technical traders use support levels to discern which spots are appropriate for buying or selling an asset, and how to correctly manage risk. A support level can often be used to set a stop-loss or take-profit order at that level. 

Also Read: How to Use Stop Loss and Take Profit in Trading?

There are different applications to support levels. For instance, a support level is not always a linear level or a single price point. Instead, it can be the moving average of a coin (if it is in a downtrend). Traders analyze different support levels to assess what the key levels for “smart money” and institutional investors are to enter the market with large amounts of liquidity. On the flip side, if a support level is broken, a new trend can begin and a coin can flip from a bullish to a bearish trend. 

What Is the Difference Between Resistance Levels and Support Levels?

Resistance and support levels are mirrors of each other. A support level is the price floor of an asset. For instance, in the 2017 bull run, Bitcoin set an all-time high of around $19,000. At the time of writing, this level serves as the support level for Bitcoin. Despite trading around this level for multiple weeks, it has held around it. Previously though, this level was resistance for a long time. Whether it breaks or holds in the long run, it shows that a price range can turn from support into resistance or vice versa. 

How to Trade Support Levels in Crypto?

To set up a profitable trading strategy, traders need to identify support levels. There are several ways to do that. 

One option is to use previous highs and lows that the price set. Previous lows are relevant for a support level, although previous highs can also serve as support, such as the $19,000 all-time high for Bitcoin. Alternatively, traders can use a moving average indicator to find long-term and short-term support levels. Particularly the 200-day moving average is popular among traders trading the daily or weekly time frame of a coin. However, there is no fixed rule, and different moving averages can serve for interpretation. Trendlines can also be support levels, as they are similar to linear price levels. 

Traders then define profitable spots to enter a position. For example, support levels are often used to enter a long position. A trader would buy a coin that is around support with the expectation that the level holds. They can also choose to close short positions or take profits or cut losses on previous positions. The exact strategy depends on whether a support level breaks or holds. 

Traders can set entry orders right at a support level, although not all traders do that – some prefer to have the confirmation of support at this level before entering a long position or closing a short. This sort of confirmation is called a bounce and helps traders with entering the correct positions that maximize their profitability. 

A level can also break. In that case, traders can take an aggressive or conservative approach. Aggressive traders play a breakout if the price passes the support level convincingly and set their entries shortly after the resistance, with a stop-loss slightly below it. In case a support level is broken, traders enter a short position, looking for the price to fall even further. 

A conservative trader waits for a pullback to the previous level of support. If they receive confirmation that this level has turned from support into resistance, they enter a short position. This is called a restest and is a common way of receiving added confirmation that a level has flipped. However, retests of previous levels do not happen all the time. Conservative traders are in a trade-off, where they choose between waiting for confirmation and entering a more risky short position. 

Price levels can thus be helpful but are not the end-all-be-all of technical analysis. Traders also use other information like fundamental changes to an asset’s valuation and other technical indicators. Furthermore, the interpretation of support levels (and resistance levels) is an art more than a science and traders often disagree about these levels.