A key component of technical analysis, resistance levels help traders identify potential turning points in the market and develop strategies for buying and selling. A resistance level is a price point where a cryptocurrency typically encounters selling pressure that prevents it from rising further.
At this level, the price tends to ‘resist’ moving higher, as sellers outnumber buyers, causing the upward momentum to stall or reverse. Resistance levels are formed when a large number of traders believe that the cryptocurrency is overvalued at a certain price, prompting them to sell, which makes it difficult for the price to break above the resistance level.
Traders can identify resistance levels using various methods, including analysing past price movements using horizontal lines, trendlines, and moving averages (MAs). Additionally, similar to support levels, resistance levels often occur at psychologically significant prices, such as round numbers (e.g., $100,000 for Bitcoin), where traders expect the price to face strong selling pressure.
If a cryptocurrency has struggled to rise above a certain price point multiple times in the past, that price is considered a resistance level, and traders might sell their holdings in anticipation of a price drop. Additionally, traders also often set take-profit orders near resistance levels: If the price reaches the take-profit target, the trade is automatically closed to lock in gains, anticipating that the price may not rise further.
If the price successfully breaks above a resistance level, it can signal a breakout, where the previous resistance level may become a new support level. This breakout often indicates strong bullish momentum and can lead to further price increases.
Note that, at times, the price might briefly rise above a resistance level but then fall back below it, which is known as a false breakout. This can mislead traders who may have expected the price to continue rising.
