If you have done any research into technical analysis, you have probably heard traders talking about resistance, support, and trend lines. Learning how to use these lines effectively is one of the best ways to become a more knowledgeable cryptocurrency trader. This topic can get a bit confusing, so my goal is to keep it as simple as possible so that you can start applying it to your everyday trading.
We are going to start out by talking about resistance lines. Resistance lines act as a ceiling for the stock price. The resistance line is drawn at the highest high during a certain time period. As you can see from the image below, the red line is the resistance line. I drew it at the old resistance level in order to prove a point. Resistance lines can help you determine breakout trends. As you can see, Bitcoin had a difficult time getting over this resistance line. It kept getting close and then bouncing off of it. Despite this, once Bitcoin broke through the resistance line, it had a significant gain.
We use support lines in the same manner that we use resistance lines. The only difference is that a support line acts as a floor for the coin to bounce off of. Look at the image below:
It is difficult to completely show this with crypto’s because of the incredible upward trend that the market has had. You can see that Bitcoin has a strong support where I drew the red line. Whenever the coin price gets close to this price, it seems to bounce off and move in a positive direction.
You have probably seen other lines drawn that follow the movement of the chart more than the resistance and support lines that are drawn above. The type of line that you are thinking of is a trend line. Look at the red line I drew on the image below:
This simple example shows the power of drawing these lines. Just as before, the coin’s price seems to get close to this trend line and bounce off. It is all about the uncertainty of the traders that own the coin. When the coin hits peaks, some traders are going to sell off but the coin usually corrects itself near these trend line prices.
So How Can You Use This?
It is all about being smart and being consistent when you are drawing these lines. Make sure you are using the same time frames when you draw the lines. Don’t make a decision on a 12 month chart one day and then change your decision because of a 2 week chart. They are telling you two completely different things. Focus on using these lines to help you pick trends and buy the dips. Also, these lines can be helpful when deciding where to put stop losses. If you think a coin is making a big positive run, it is sometimes a good idea to put a stop loss at the support trend line just to be safe. Remember, this is a basic look at these types of lines. If you want me to get more advanced with this, please let me know in our Facebook group.