The summer of 2021 is nothing short of a powder keg waiting for a spark to ignite the chaos. The vast majority of crypto traders are in anticipation of a sudden breakout in crypto prices, while thousands of small projects are preparing for the next step in their coins’ life cycles.
It’s easy to notice how crypto activity is more or less limited based on the current market conditions as hibernation continues before a massive breakout. There’s no doubt that a breakout is coming, as the whales that caused the crash are looking for yet another entry point to bring the market back up again.
But what should retail traders like you and me do in this situation? Well, the safest option is to find a really good entry point on whichever coin you are trading at the moment and just sit tight until the market recovers. But this could be months or even years in the making. For those looking for some action, the best approach is to follow resistance and support levels as much as possible.
Using Support and Resistance
The support and resistance level strategy is probably the most useful one for crypto traders. It’s also used in other assets like stocks and forex, but the crypto market seems to be designed around it.
You see, during market correction times, much like what we see the market experience nowadays, the price movements are heavily reliant on large and medium players making their moves. Most of these moves are dependent on previous market highs and lows.
So, for example, if we take a look at the BTC/USDT pair on Binance, we can immediately see the pattern. Let’s take data of the prices between May 23rd and June 7th.
BTC plummeted all the way down to $31,000 per USDT, which then became the new support level as it didn’t go below that price point. Then, during the recovery, it managed to reach as high as $40,000 which then became the new resistance level as it couldn’t punch through this price point.
We can then see the pattern unfold in between these price points. The price plummeted on May 26th, going all the way down to $33,000 per coin, but couldn’t go below it. Why? Because most traders were already getting rowdy when the price was nearing a strong support level and started buying. Therefore, it rebounds from $33,000 and starts to rise once again, reaching $39,000 on June 3rd. But, that’s where we also see the strong resistance come into play. Those who entered at $33,000 due to market signals of nearing support, started closing their positions due to a nearing resistance point at $40,000. This is why we see a sudden drop in price on June 4th.
And starting from June 4th, we see new support levels forming, while the resistance remains the same. The price once again rebounds at $34,800 confirming that traders are now less likely to let it drop again to $31,000 as they’ve identified their “playing ground” so to say.
Utilizing this gap of price between $31,000 and $40,000 will most likely go on for a while before whales start entering again. In fact, they may even be looking at the current activity, to see if there is enough bearish momentum to break through the $31,000 support level. Should it happen, then it’s likely for the whales to immediately start entering the market.
Why is Support/Resistance Preferred?
One of the main things I need to mention about the support/resistance strategy is that it’s very labor-intensive. And by labor-intensive, I mean that the traders need to always be on high alert to see when the price starts to spike or crash so that they’re ready for the perfect entry/exit point.
Naturally, there are tools to help with this issue such as signals or “stop-loss” and “take-profit” orders, but they’re not enough.
You see, the support and resistance levels constantly change in the crypto market. The example I showed above is an isolated case where the same levels have lasted for more than 2 weeks. In most cases, support and resistance levels last around 1 week during correction preparation phases.
So, in order to combat this, most traders simply opt for automated trading methods, aka trading bots.
Just to bring it as an example. If we take a look at the Bitsgap (a relatively popular trading bot) crypto trading robot features, we can see that the algorithm on which the bot is based heavily relies on these support and resistance levels. It automatically determines new ones as the market moves, and can even broaden its perspective based on the time-frames used.
For example, if the trader indicates a day-based support/resistance system, then the bot will only consider highs and lows on that particular day and determine the best entry/exit points. But most traders prefer to put on a minimum 1 week and a maximum 1-month system.
Is Support/Resistance a Sustainable Strategy?
No. The support/resistance strategy relies on some kind of predictability in the markets. Meaning that there are no sudden plunges or spikes being anticipated in the near future. This is why it’s a really useful strategy during market correction phases. As the market gears towards a new high or a new low, the period between those spikes is the most advantageous for quick gains.
Why? Because both the bulls and the bears want to see where the price may go. If the strongest support level is pushed through, then bears win and they can wait until the price further plunges to buy up. In this case, a much earlier support level is determined. In today’s case for example. The support level for BTC would drop to $30,000 as it managed to rebound from it in mid-May, but if that is also broken then it will then move to $29,000 which is the price level it started spiking from in late January.
A similar approach would be for the resistance level.
But regardless of how enticing this strategy may seem right now. Please consider that the crypto market is extremely volatile and hard to predict. The powers that currently influence the largest coins don’t subscribe to the “tried and tested” methods used before. The market constantly changes, which means any strategy that may work today, may not work tomorrow. Approach trading as cautiously as you can and only trade with funds you are comfortable losing.