Users, who want to engage in advanced trading systems like running an AI crypto trading bot or something similar, won’t have to use old-school analytical approaches that can look outdated by modern standards. The age of any method does not mean that you should forget about it completely just because novel or more effective ones took its place.
We will talk about using a typical support and resistance trading strategy to achieve consistent results and place orders strategically to ensure that you are adhering to a reliable system protected from various risks and giving you the necessary guiding lines to follow along.
As always, we have to remind our readers that the information below should not be considered financial advice and carries only educational value for newcomers who are still learning the basics of technical analysis (TA). Experienced veterans often have the intuitive understanding of these concepts.
What are the support and resistance in trading?
Understanding these fundamental terms is essential for any retail investor interested in mastering the craft of market forecasting. While many other concepts are thrown around consistently, these two form the backbone of any analytical approach in TA.
Assessing the market sentiment and trying to crack the code determining the collective psychology of traders participating in the market are incredibly difficult tasks that many people cannot fully understand and achieve even after years of practice. The eternal fight between bulls and bears is all about boundaries within which battles take place.
Before we start exploring these crucial terms and how they can be used effectively in financial prognoses, it is important to remind our readers that TA is not science. Many popular strategies do not produce reliable results and often output false positives that can be devastating to a portfolio of a newcomer without any experience and knowledge of how to reduce risks.
It is not hard to learn how to identify when there are invisible walls that make assets bounce. However, understanding how these conditional barriers affect strategic decision-making and how to utilize the knowledge correctly can be challenging even for seasoned veterans.
How to determine support and resistance
Financial markets do not have static prices. The dynamic of fluctuations, the volume of trades, and the general sentiment of market participants form the so-called price action. The value of an asset is a floating metric that can change depending on a variety of factors. While it is possible to use different methods of analyzing a stock by looking at its fundamental metrics, such as real investments, labor force, or brand value, cryptocurrencies are purely speculative instruments and using TA is often the only viable option for retail traders.
Using a typical support and resistance strategy in trading can yield excellent results regardless of which periods and markets you focus on. Short-term systems that rely on quick reaction and reliable execution of orders require a deep understanding of these terms just like any approach that utilizes positions that are supposed to be held for years.
Here are the definitions:
● To understand how to find resistance and support levels in trading, you must know that they represent the relationship between supply and demand. When the demand is high, more people are buying something and the price falls until the demand is gone. On the other spectrum is the overwhelming abundance of assets that nobody really wants.
● Support, as the name suggests, is the level where the desire of market participants to purchase assets equalizes with the willingness of others to sell them. It is usually the lowest local price. It can be very strong and remain parallel to the horizontal axis of the chart or weak and follow a descending trajectory.
● The opposite is true for the second term. Resistance drawing is easy for many retail traders even if they do not have much experience simply because it often aligns with psychological barriers. For instance, a certain token may be reaching close to $10, a round number, but fall short every time. It can be one of the strongest identificators representing the indecisiveness of the market to break through a mental barrier.
Since many of these lines are quite strong and form noticeable corridors, you can automate many strategies that rely on trend continuation. For instance, it is fairly easy to adapt a grid bot crypto system to produce consistent profits on the spot market by allowing it to operate within an ascending price corridor that you can clearly identify by simply drawing easily identifiable channels.
Let’s learn how to look for them
A reliable way of identifying them on a price chart is by using graphical tools like a straight line and drawing it across at least three points where the price is the lowest or highest. Some experts believe that even two dots on a chart can be enough to create a reliable reading but we strongly suggest finding at least three (preferably, more) dots that can be connected by a straight or nearly straight line.
These dots can be arranged in various ways:
● Ascending corridors are formed during bullish movements when traders are assessing the demand and supply over multiple “battles”. When bulls consistently beat their opponents, both the lower and higher ends of the chart move up.
● Descending corridors happen during bearish movements because the demand is slowly falling but the market cannot immediately determine where the equator should be drawn. During strong trends, the lower line can be much steeper.
● Horizontal corridors form quite often in cases where the upper limit represents a psychological barrier. Some describe this situation as bulls attempting to break through. On the other hand, it can be a precursor of a downtrend.
It is possible that the corridor formed by these lines is expanding or narrowing. The former is usually caused by higher volatility and indecisiveness of market participants, the latter is often a predictor of a strong trend that will form when traders make a collective decision about the value of any given financial instrument.
Support and resistance examples
Theorizing about the importance and validity of various TA approaches does not lead us anywhere. Instead, we want to give you several practical examples using the most popular cryptocurrency out there. We will different types of these levels using graphical tools and indicators that are available to all retail traders.
Using graphical tools
Experts recommend choosing specific types of prices to build these levels. For instance, you can use closes or highs. On the other hand, perfect alignments happen rarely. To have a clearer picture, you should not try to use straight lines and searching ideal scenarios.
Here’s a good example of a floor that formed recently in the BTC/USDT market due as traders were testing the impact of breaking through the psychological barrier of $100K.
Here, the line is nearly horizontal suggesting a high level of indecisiveness from bears who could not bring the asset back to evaluations typical for the period six months prior to the breakthrough. Many argue that the floor will be robust enough to warrant a powerful bullish movement during the next two quarters of 2025.
Below is a perfect illustration of the opposite scenario that was developing just one week before the asset broke through the $100K barrier.
The line is almost horizontal once again as traders collectively were testing the strength of the hurdle ahead at $98K. Many TA specialists were predicting the rapid increase in market cap right after we moved past this particular milestone. In hindsight, they were absolutely correct and predicted the behavior of the market quite well.
How to draw support and resistance lines in trends
Static horizontal movements occur rarely. They are often visible on higher periods when you zoom out and see outcomes of different encounters between bulls and bears. Upward and downward trends also form corridors of channels within which the evaluation of assets can bounce quite frequently.
Here are several examples that are created using the same line tool on the TradingView chart.
The ascending channel is formed by the push from bulls to increase the price and form a strong platform for the next one. However, the outcome of this trend was a relatively long retracement followed by a very passive horizontal movement. From the point of view of fundamental analysis, the ongoing US presidential campaign made many retail traders indecisive and afraid to commit to either direction.
This is another channel that was formed just before the push we discussed above. This particular movement was well-defined and caused many investors to give in to panic and talk about the inevitable downfall of the bullish movement. Some expected a spectacular crash. However, nothing particularly bad happened. After a dip, it was a smooth journey to over $70K in just a couple of weeks (over 29.8% growth).
Note that having fun with these lines can be an addictive activity that often does not produce any actionable prognoses. For instance, the strength of the horizontal floor that we used as an example above was tested only three times with each bounce producing a much stronger correction than the previous.
Investors with long positions benefited immensely from simply using a DCA bot crypto system and leaning back in their favorite armchairs. However, the same signal could be interpreted differently. For instance, the evaluation was wonky multiple times before the asset climbed back to over $100K during the long three weeks between December, 19, and January, 6. Many were rightfully predicting that it could be the start of a powerful bearish push.
The back-and-forth between different schools of thought and practitioners produces wildly different results and identifying good advice can be very difficult even for people with rich experience in financial markets.
Using an indicator for a support and resistance chart
Drawing everything manually is challenging, exhausting, and nerve-wracking considering the responsibility to correctly predict the next movement in the market. It is often a good idea to use time-tested TA tools that are convenient, relatively easy to learn, and provide the necessary insights to make informed decisions about the strategic placement of orders.
Here are some interesting indicators that you can use to determine the upper and lower limits of fluctuations:
● Bollinger Bands is a beloved instrument in the community of TA enthusiasts. It displays a distinct graphical band that envelopes the candle chart in simple moving averages representing upper and lower prices making it easier to see the dynamic and predict potential fluctuations. In a sense, outer limits show you where bulls and bears are headed at the moment. It is a good way of making predictions and selecting ranges for delayed orders (stop-loss and take-profit). The tools have many variations used by the community of the TradingView platform.
● STARC bands or Stoller Average Range Channels can be used to follow the S&R levels even closer with outer lines representing athe verage true range component and showing you a more detailed corridor which can be useful during trends with poorly defined limits. STARC is also available on many terminals including TradingView. The tool was developed by Manning Stoller back in the 1980s but it was overshadowed by Bollinger Bands despite providing interesting insights and allowing users to refine order placement.
● Fibonacci Lines are not an indicator in the truest sense of the word. It is a graphical tool that can be automatically applied to the chart when the user simply defines the baseline. It can be used to predict future S&R levels or determine optimal ranges for delayed orders. Practically, this particular approach has been tested many times and does not yield the same results as promised by theorists. Nevertheless, it can be used as a very vague guideline when you do not have any insights to work with. Inaction is the worst enemy of a retail trader.
Automating a strategy relying on these limits
In a survey of the crypto ecosystem, researchers revealed that over 65% of all investors use automation to at least some degree. Institutional investors rely on fully automated trading systems (ATS) even more with over 99% of all managers using different instruments to increase the efficiency of their operations.
Automation is a valuable tool that must be explored by all retail traders who are interested in optimizing profitability and achieving consistency while engaging with speculative digital assets. Many time-tested approaches like grid and DCA bots have already established themselves as staples in the world of investment. They can deliver impressive results with a surprising level of reliability.
Several companies offer various forms of these high-performance ATS products:
● WunderTrading is an industry-leading automation vendor with a diverse feature lineup showcasing excellent custom robots, flexible grid and DCA templates, and a big copy trading platform with hundreds of lead traders from all 14 supported CEXes. One of the recent additions to the catalog is the AI-assisted statistical arbitrage system capable of managing a well-diversified portfolio of digital assets.
● CryptoHopper is a trustworthy provider of different robot builds. It has also invested heavily in innovating the platform and delivered an AI-enhanced grid system that can adjust positions in real time according to market conditions. The platform is known for its technological advancements and user-friendly user experience.
● 3Commas is a solid choice for people who need social components and enjoy user-generated content. The marketplace here is a great place to search for new investment ideas, instruments, indicators, strategies, and signals. You can also go to the copy trading section and start mirroring the actions of more experienced peers.
● TradeSanta will work for newcomers who are in desperate need of financial advice but cannot afford it. The platform showcases a massive collection of template strategies with over 1,000 different presets to choose from. Note that selecting something that will work for your particular portfolio and feeling fully satisfied with the choice can be a tough task.
● GunBot can be used across the DeFi and CeFi sectors of the crypto ecosystem allowing many retail traders to seamlessly switch from one type of trading to another. On the other hand, the quality of the experience may differ since many DEXes have UX/UI features completely foreign to your typical retail trader from good old Forex era.
The automation sector of the cryptocurrency industry is incredibly large allowing users to pick from all sorts of useful instruments. We do not want to limit you to just a couple of choices. However, these brands are more than solid and provide an excellent level of user experience, customer support, and technological advancement.
Utilizing S&R levels in automation
Even if you decide to simply choose a ready-made solution like a grid robot, you will need to adjust the settings to make it as efficient, consistent, and reliable as possible. In most cases, an investor is tasked with defining the following parameters:
- Price ranges within which the robot must operate and follow the DCA logic to identify good entry points.
- Position size limits to avoid overexposing your portfolio and creating positions that you do not need in your portfolio.
- Ranges for stop-losses and take-profits. These are also quite important since you need to secure returns and avoid risks.
Other options include the method of position splitting (using arithmetic or geometric progression), specific parameters for orders, and more. However, these three are the most important ones and identifying appropriate and actionable support and resistance zones is crucial for their long-term performance.
S&R limits allow investors to select appropriate ranges for their ATS setups and optimize potential profitability by selecting reasonable values for take-profits. You can also protect you positions with stop-losses which can also be determined using preemptively identified channels.
Running an automated trading bot that has parameters that are not made up is a great way to add some robustness to your portfolio and create a system that produces quantifiably good outcomes in the long run. Since automation is incredibly popular, you must learn how to use it effectively.
The main takeaway
Understanding the importance of concepts like these ones is unbelievably useful for all retail traders who operate in the cryptocurrency market where most digital assets are speculative and do not have any fundamentals to judge them based on more traditional approaches. However, it is also imperative to avoid the cultist thinking and believing that lines on a chart can predict the future and explain the behavior of millions of traders making their decisions for, who knows, what reasons.
Make sure to learn the basics, practice, and apply them where possible. Do not build whole strategies based solely on enveloping candle bars into some weirdly shaped moving averages. Everything has its own place in an analytical system. These particular concepts must be reserved for rough estimations, identifying good parameters for ATS setups, and picking ranges for delayed orders.