Every trader knows about the meteoric rise of bitcoin in the last year, from a low of around $750 in January, to an all-time high of $17,000 as of December. It has even been reported that in select few exchanges the currency had even momentarily surpassed $20,000, thus marking a growth of more than 2000%. However, for the average speculative trader the Bitcoin currency poses a significant risk to their portfolios, as it does not utilize the traditional barometers of risk management usually accorded to foreign exchange markets. This is because the parabolic growth of bitcoin has made it exceedingly difficult to determine appropriate support and resistance zones based on past price action, without having to resort to ill-thought out psychological price barriers like $5000 or $10,000. These nice round whole numbers are the only solid technical tool that is truly visible to the eye, as trades based off of unorthodox methods like Fibonacci retracement and moving averages are rarely employed as a trader’s main battery. Regarding a more pragmatic approach, traders cannot use secondary tools like Fibonacci without knowing the support and resistance levels, because such secondary tools can become incredibly misleading and do not assess decisive market shifts (they only asses trends). For example, in statistics it is true that the continuation of a trend enhances the probability that the trend will continue, but longer exposure to market forces also exponentially increases risk. Since traditional support and resistance offers us a clear indication of decisive market action, whereas secondary tools do not, it becomes clear that we can use the former without even relying on the latter at all. However, in Bitcoins case it becomes exceedingly dangerous to rely on psychological barriers like $5,000 and $10,000 that are not confirmed based on past price action. Simply because the price of Bitcoin has tested $10,000 once does not mean that will hold true for the foreseeable future. This is the difficulty I have come to face in accepting psychological barriers as a legitimate trading strategy.
Not all hope is removed from this grim conclusion, as support and resistance trading is still very feasible in cryptocurrency markets. However, it is not in Bitcoin that you will find your luck, but in altcoins. Altcoins seem to resemble traditional charts with support and resistance cemented in past price action. This gives traders the ability to avoid excessive risk in relying on untested psychological barriers. For example, in the case of Ethereum we are able to see a clear support level at around $400 which has been tested and verified three times; in September; November; December. The same concept applies to DASH which has also tested the support/resistance level around $600 three times in the past two weeks. This even holds true for volatile currencies like Ripple which has tested the support level at $0.20 about five times in the past month.
It is not always that easy to be able to pinpoint appropriate support and resistance zones in volatile currency pairs as we can see in the case of IOTA, but the main takeaway from this piece of writing is that traders should be wary of subscribing to principals and laws that have little empirical means of verification. The philosopher David Hume was able to posit the problem of using inductive reasoning and probability, because it was not based on fundamental truths (like 2+2=4). Although this is very much the case with support and resistance, at least you are saving your breathe knowing that the probability is in your favour. I’d prefer that to using the wild cards of psychological barriers and Fibonacci to gauge my risk appetite.