Cryptocurrency price lines of resistance and support
Cryptocurrency rate dynamics. Analysis and forecasting: where to start?
Traders usually apply a lot of technical and fundamental analysis methods to forecast cryptocurrency rate including bitcoin rate. They may analyze order books, monitor the latest news, review current local, and international economic tendencies affecting pricing. However, diagrams indicating cryptocurrency rate movements are still considered to be the most effective analytical tools for traders.
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Bitcoin rate dynamics, which is indicated on a graph, can be used to demonstrate the overall market situation, forecast the major traders’ plans, and forecast the future bitcoin rate movements, respectively.
From the classification point of view, all of the analytical tools, based on graphs, order books, and trading volumes research on the cryptocurrency platforms can be generally called the technical analysis methods (TA).
Today we will have a look at the technical analysis basic concepts – lines of resistance, and lines of support determined in course of careful cryptocurrency rate dynamics inspection. Additionally, we will review a method based on the mentioned lines; method aimed to determine the current price trend.
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Lines of resistance and support. What are they? How to apply?
We shall closer review bitcoin rate dynamics on EXMO to understand in a specific context how to determine the support and resistance lines.
Now, we shall take a look at the graph itself. We can see quite significant rate volatility, which can be explained due to active bitcoin price growth contributed to market overbought, panic sales, and rapid price decrease. However, when the price reached a specific point, it stopped decreasing, and the so-called “bounce” occurred. As result, price begun stabilizing. All in all, the optimistic expectations over bitcoin price increase reappeared following the bitcoin rate growth.
What did stop the price drop? Evidently, the rate decrease was stopped by a great number of buy limits produced by traders expecting the asset future increase. Traders willing to buy without waiting for further bitcoin price drop contributed to the rate decrease stop; there is likelihood that these orders included so-called “walls” – huge-volume orders produced by active traders among the overall orders amount.
The line, which was drawn through the minimum peaks, is called line of support. Bitcoin price could not break this line. A line of resistance, which is drawn above the maximum prices, prevents bitcoin rate growth is formed in quite the same way. It is formed with the help of traders willing to sell the asset reaching the specific prices to fix the profit till bitcoin price goes down. From time to time the competitive of bitcoin price could make from 10800 to 12000 USD, growing even higher (line of resistance has broken the graph, so we cannot see it).
That means that resistance lines include the important market price “peaks” appearing whenever the traders cannot longer, or do not want buy an asset at the higher prices. On the contrary, the support lines combine the important lowest market price “peaks” appearing whenever the traders cannot longer, or do not want to sell an asset at the poorer prices.
Having analyzed the lines of resistance and support, and rate dynamics (bitcoin rate, for example), a trader will be able to put a price with a potential to go up (according to data provided by support line), and with a potential to go down (according to data provided by resistance line).
The discussed analytical tool is aimed to help determining the trendline. The information about it follows below.
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Trendline. Practical application
In the most cases, under condition rate is getting close to a price border, the asset price cannot overcome one of the lines shaping these borders changing its direction. It can either move horizontally, or make a sweep. Thus, if we take a look back at the graph above indicating bitcoin rate dynamics, we will see that a single bitcoin price going up did not succeed breaking the support line (watch 29th date section). As result, price drop turned into temporary, but powerful price growth. The rising trend is called positive, and the dropping – is called negative.
Notice that if trend is shaped by the horizontal support and resistance lines, then, these lines are called the levels of support and resistance. In this case, trend could be logically called horizontal, or sideway. However, in the traders’ community such designations are usually said to be irrelevant. They simply reflect a price flat, and absence of a specific trend.
The ascending trend tell us that the trading situation is characterized by the prevalence of those buying an asset; the descending trend demonstrates a growing number of pessimistic sellers willing to drive the asset price down. Under price flat, the volume of the buying operations pretty much equals the volume of selling operations. The less the price volatility under flat is, the less the number of traders willing to perform actively on the platform, namely, perform “market” deals.
Depending on how trend line is balanced, and how lines of support and resistance are abundant with the orders of huge, and medium volumes, a trader can rely upon it to a greater or lesser degree. The more trend curve is powerful the greater impulse is needed to break through one of the lines shaping its borders. If a line is broken, price shift is to be expected; whether it will be up, or down depends on the kind of a broken line. Thus, if the support line, taken on our graph, was broken where it is matched by the arrow, then we could have expected for a bitcoin price going down to 7000-7500 USD; the overall trend strenght could have been also changed.
In the last case, after price stabilization at the reached levels, the new lines of resistance and support would appear. Along with that, previous line of support would have become fundamental for the new line of resistance. Certainly, the similar situation could occur under breaking the upper line. In this case, the initial line of resistance would change its place with the final line of support.
The mentioned regularity can be seen whenever the levels of support and resistance are broken (notice that the lines turn into levels under price flat, when price corridor is horizontal). That is how trend line determines the future price for an asset, and reliability of the forecast.
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