Key to the execution of successful buy and sell orders is the identification of support and resistance areas on the charts.

Cryptocurrencies are highly volatile assets. That means that there is a wide difference between the lowest and highest prices for any particular trading day; a lot more than many currency pairs you will encounter in the forex market. This has advantages and disadvantages.

Support Level

• When price at which an asset finds hard to go below.

Resistance Level

• When price of an asset hard to move above.

Establishing Resistance and Support Levels

To identify these key areas by using the previous reaction highs or lows.

Using Previous Horizontal Key Price Levels

• The resistance levels represent areas where the selling pressure on the asset pairing subdues buying pressure. Therefore, there is more selling interest.

Using Trendlines

• Trendlines are usually diagonal in orientation, so are useful in identifying support and resistance in the circumstances of trending prices.

Using the Fibonacci Tools

• The Fibonacci retracement tool can be used to trace five price areas (by default) that could be used as support or resistance, depending on where the initial trend is heading.
• Once any potential areas of support or resistance have been identified, they must be validated before they can be used for trade entries or exits.

How to Validate Support/Resistance Levels

• Role reversals can occur if the key levels are broken by strong price action. A violation of support renders this level a new resistance. Break of resistance turns that level into a support.
• Retests of key levels reinforce those levels, making them more valid.
• If increasing volume accompanies price action at a resistance/support level, the trend that forms from those areas is validated.
• Only use recent history when searching for previous support/resistance levels.

When the price action of a currency pair approaches the support and resistance points, one of two things can happen:

1. The candles will hit approach the key levels and may even cross above a resistance or cross below a support, but then may retreat and close below the support or above the resistance. In this case, the price action is said to have “tested” the key levels.
2. The candles will breach the resistance/support lines and close above/below the key levels respectively. In this case, the key levels are said to have been “broken” or “breached”. This situation may occur after repeated testing of the key levels or if the momentum is strong enough, may occur straightaway.