Trading for beginners: how to define levels of support and resistance

For those who missed. The first part of a series on cryptocurrency trading, read here.

Imagine that inside the house threw a bouncy ball. There are two hurdles that limit its flight and fall is the floor and ceiling. In trading, there are similar obstacles, which are called support and resistance. They limit the price movement of an asset and serve as the most popular tool for any trader.

Support and resistance can form the schedule of prices of the cryptocurrency for months. In the traditional markets there are global levels from which the price retraces over the years.

The beauty of these lines that uses them the majority of traders, and hence certain levels can be quite safe to use as entry points for trade deals. A detailed description of the support and resistance published in Coindesk.

Support

Why is the price almost always bounces off support? The line on the graph is quite meaningful interpretation. Each buyer has its own value in which he believes the asset is undervalued. Every trader is looking for a good entry point, based on my experience. If earlier the price rebounded from a certain level that means this level has become acceptable to most buyers.

New players will find the support of a good entry point and the price will rebound again. The concentration of orders at a certain level will increase the “strength” of support, preventing possible collapse of prices below.

Resistance

On the other hand, the maximum point on the graph form a major psychological level ceiling. If the asset can not break through the resistance for a long time, so to open long positions at this level very dangerous.

As in the case of support, the pressure on a certain line creates a barrier through which hard to get price. The more kickbacks from the resistance, the stronger it gets.

Horizontal levels of support and resistance

The main rule identify key levels — they are not just lines. On the graph sometimes you see fake breakouts of support or resistance is a good trap for bulls and bears. Inexperienced traders can open a position at the first breakdown and then fall into a trap.

To avoid this fate, consider support or resistance of a certain area, not just line. Also it is recommended to find key levels on the line chart, which takes into account only the closing price of the asset. To determine a likely fake breakouts will help technical indicators, the essence of which we’ll cover in future articles.

So how to identify support or resistance? Consider the example of 1-day chart Monero/Dollar. On the background correction of the stock market asset struck a single, global level of support and rushed to the new. The second level is holding the price.

Now resistance on 1-day chart Monero/Bitcoin. At first the price twice bounced from the first level and then two more times from the second.

For price movement relative to the support or resistance fair rules:

  • when the price passes through resistance, that level could turn into support;
  • the more often price tests a particular area, the more pressure there is for buyers/sellers;
  • when support/resistance is broken, the strength of the subsequent price movement depends on the strength level;
  • the power of support/resistance depends on the time period. Line on the daily chart is more reliable than the line on the 1-hour.

Identifying key levels of support/resistance comes with experience. Don’t forget that there are not only horizontal levels and trend lines.

How to determine trendlayn

Unfortunately, some traders do not know how to determine the course of the trend of the asset. To determine the inclined line of support/resistance is enough to find the local minimum/maximum prices.

In the case of growth trendlayn connects the lower point.

In case of a fall — the top point.

To construct the trendline, it is enough to find 2 points. However, valid to consider only the trendlayn, which is in contact with the schedule of prices at three points.

For trend lines, characterized by their own features:

  • the steeper the angle of trendlayn, the less reliable it will be in the future;
  • the more often a price touches a trendline, the stronger will jump/fall in the price after the breakout;
  • the longer the trendline (on higher timeframes), the more reliable it is.

It is noteworthy that the price is not necessarily moving up or down. After noticeable drops often the stage of accumulation, which is characterized by lateral movement. It is worse suited for trading. You can verify this, having thoroughly reviewed the chart of Bitcoin over the past couple of weeks.

As you can see, the chart is not visible signs of the upcoming price movement.

As with horizontal support/resistance, do not try forcibly to adjust trendlayn under the course of prices. To avoid false breakouts of trendlines, put it on a linear chart, or shadow.

How to use support and resistance

There are two most simple strategies for trading transactions trendline — bounce and break.

The first involves the opening of a long position after confirming the rebound from the support line. Why not place an order in the support area? Nobody knows, will you hold it line this wave discharge. And although so you can get more profit, most likely this strategy will end in loss of Deposit.

If after a rebound the price will still go down, losses from failed transaction block stop-loss. Read more the mechanics of the placement of stop losses we will look at the following articles.

To trade breakthrough is somewhat more complicated. It is already possible to benefit in two ways — aggressive and conservative. The first involves opening short/long positions immediately after the penetration of support or resistance.

Why is this method sometimes not work? The fact that after breaking through resistance and support very often retracement, which again is testing the line. Sometimes this retracement could lead to another trap which causes the trader to close the position in minus.

The conservative method involves opening a position after a retracement towards the resistance/support. If the price, having tested the line, again, bounces off it, trading can make good profit with minimal risk.

SUBSCRIBE TO OUR CHANNEL IN THE TELEGRAM. WE’LL MAKE YOU RICHER THAN SATOSHI.

Leave a Reply

Your email address will not be published. Required fields are marked *