A support level in cryptocurrency trading refers to a price point where a cryptocurrency tends to find buying interest strong enough to prevent the price from falling further. It’s a level at which the asset’s price historically does not fall below (the ‘floor’) or tends to rebound from.
Support levels are a fundamental aspect of technical analysis. Traders use them in combination with other indicators to assess market trends and make informed trading decisions. At the support level price point, traders typically believe the asset is undervalued, leading them to buy, which increases the price.
Traders can identify support levels using various methods, including analysing past price movements using horizontal lines, trendlines, and moving averages (MAs). Additionally, support levels often coincide with psychologically significant numbers, like round figures (e.g., $100,000 for Bitcoin). Traders pay attention to these levels because they represent a collective sentiment.
Traders use support levels to make decisions about when to enter or exit a trade. If a cryptocurrency has previously struggled to fall below a certain price, that price is considered a support level, and traders might buy in anticipation of a bounce.
Additionally, traders often place stop-loss orders just below a support level. If the support level is breached, it may signal that the price will continue to fall, triggering the stop-loss to minimise losses. If the price falls below a support level, it can indicate a breakdown, where the previous support level now becomes a resistance level (a level where selling pressure overcomes buying pressure and prevents the price from rising). This might signal a bearish trend or continued downward movement.
Sometimes, the price may briefly dip below a support level but then quickly recover. This is known as a false breakout and can trap traders who have set their stop-loss orders too close to the support level.
