Today I would be talking about a basic trading strategy that could be profitable when mastered. The support and Resistance levels
Support and Resistance Levels
Support and resistance levels are the most common liquidity levels identified by almost all traders in the crypto ecosystem and beyond.
These are key liquidity levels where most of the traders available in the market set their orders to be executed.
Even with any other technical strategy, a good trader needs to respect these key levels. In my experience, support and resistance levels are the priority levels for any trader to identify in the market before any trade.
Support and resistance are used to identify key liquidity levels. These key liquidity levels are zones where most traders available in the market set their orders to be filled. These levels are associated buy high buying and selling pressures where the price seems to react strongly when the price reaches these levels.
With support and resistance levels, we can easily identify trading signals to make trades. As we are all aware, price usually reverses when they approach these levels. However, we can simply take advantage of these levels and make trades. Both swing traders and scalpers use these levels for trading.
The idea of support and resistance can be used alongside other technical strategies and other technical indicators to spot better signals. In my experience, technical indicators seem to confirm signals very late, but with the help of these support and resistance levels, a trader can easily identify trend reversal and trend continuation before further confirmation from the technical indicators.
Support and resistance levels improve the trader's psychology. Trading involves good psychology and a good technical strategy as well. Different traders from different parts of the world word different traders with different psychology. However, when a trader can identify these levels during their analysis, the trader might have better psychology on whether to hop into trade or not.
Resistance breakout
Breakouts simply refers to the situation where prices break key levels or trendlines. These breakouts occur as a result of injecting huge volumes or ejecting huge volumes from the market. In any case, there would be a breakout.
Breakouts usually occur after a ranging market where the market structure would be shifted. Just like Wyckoff's method, the accumulation phase ends in a breakout, reaccumulation also ends in a breakout, and distribution and redistribution also end in a breakout. In any case, there would be a breakout but it depends on the trader to identify the current phase of the market to identify the correct breakout.
As we are all aware, the accumulation phase can’t be followed by a bearish breakout. In that case, we would identify it as a false breakout.
However, it would be very difficult to easily identify a false or successful breakout hence we can use technical indicators to filter out false signals.
Technical indicators are great tools for technical analysis and trading as well. Usually, these support and resistance levels are used alongside some of these technical indicators to identify perfect signals for trading. Today we would identify signals with the popularly known RSI indicator and the volume indicator as well.
The RSI indicator is a momentum-based indicator that is used to identify the momentum of the market and the trends as well. On the other hand, the volume indicator is a volatility-based indicator that’s used to identify the volume in the market.
Combining these two indicators means that the trader can identify the momentum with the corresponding volume injected into the market. A bullish momentum with a small volume means there could be a possible trend reversal. However, the bearish momentum with high volume suggests a strong trend.
The RSI also indicates oversold and overbought regions which also indicates reversal levels. When the RSI crosses above the 70 level, the price is presumed to be in the overbought region but when the price falls below the 30 regions, the price is presumed to be oversold. In this case, there could be a possible trend reversal.
When the crosses and stays above the middle line (the 50 levels), it signifies an uptrend on the other hand, when the RSI crosses and stays below the middle line (the 50 levels), it signifies a downtrend.
Resistance breakouts
Screenshot from Tradingview.com
Support breakout
Just like I explained earlier, A support level is a key liquidity level where most of the traders set their buy orders. That’s a level of high demand. At the support level or the support zone, the market is presumed to be in demand and hence the market is expected to rise or go bullish.
A support level is an area or zone where the prices of the assets fail to move further downwards. Or the region for a bullish trend reversal.
During a breakout, the price breaks below the support level or the support zone. When the price fails to reverse the support level, the price continues to move further downward. When this happens, we say there’s a support breakout.
Identifying these breakouts before the actual breakout is very difficult. However, we use technical indicators to help identify a successful breakout.
Support breakout
Screenshot from Tradingview.com
False breakouts (Fakeouts)
False breakouts are known in the crypto ecosystem as fakeouts. These false breakouts occur when the price breaks a strong key level and reverses back.
Usually, when there’s a breakout, the price is expected to move further (along with the breakout). But when the breakout is rejected by the market and reverses back, the breakout tends to be a false breakout.
Screenshot from Tradingview.com
These false breakouts are usually caused by the activities of the whales available in the market. They sometimes use their huge volumes to push the market either to break above the resistance or break below the support level to give a whole new picture of the market.
This is the major cause of the false breakout. Sometimes these false breakouts may look very convincing even to experts. In this case, it’s advisable to confirm the confluences with some technical indicators.
These false breaks are sometimes caused as a result of some fundamental analysis. These whales manipulate the entire market with just simple tweets and news from the media.
To avoid these signals completely, it’s very advisable to allow all confluences to align before we hop into trades. And as I explained earlier, you can use some technical indicators alongside these support and resistance levels to avoid these false breakouts.
Sometimes these fakeouts are inevitable. That’s why it’s advisable to use good risk management.
False breakout
Screenshot from Tradingview.com
Overview
Trading is now the order of the day. Traders in the crypto ecosystem use numerous strategies to execute trades. However, I recommend everyone to master some 2 or three strategies that could be very profitable. Using different strategies every time would cause more harm than good.
Don't forget to use good risk management in trading. Always make sure your risk-reward ratio favors the profit. Do not risk money you are not willing to lose. Better still you can still use the 1% rule to reduce your risk.