Levels of support and resistance is perhaps the most ancient tool of analysis of market behaviour. Any trader will immediately give a huge amount of information on this topic. Despite the development of neural networks, an incredible abundance of various indicators and other methods of market data analysis, support and resistance trendlines are successfully used today.
This is especially true for such a young and dynamically developing market as cryptocurrencies. There are not many professionals here yet. Yes, there are a lot of arbitrators, a lot of experienced it specialists with brilliant ideas. But still, there are relatively few true professionals with big money, who have gone through dizzying rise and downs of the world financial markets. Therefore, there are a lot of inefficiencies in the cryptocurrency market. It is a market crowd.
Why do the levels work?
First and most important – the markets can be in 3 main States. This is obvious – prices either move up or down, or are in a sideways movement, is often said flat or moving averages. What happens when the resistance level breaks? The price sets a new high. This means that the asset is growing in value. About the unprecedented growth in value and new heights can be shouted at every corner, which causes an influx of fresh money – it pushes the price even higher. Thus, the breakdown of the level is the easiest way to confirm the direction of movement.
Second – if the price, for example, is in the sidewall – it means that now there are no ideas. However, as soon as the price has an impulse – the level of support or resistance breaks through-it means that there was some idea, some reason for such a change. It is likely that the momentum will continue. Often, after the release of prices from the sidewall of the rally begins – a great opportunity to earn.
How to trade at support and resistance levels?
There are two main methods of trading: breakout trading, and entry from a level. As you can see, these are diametrically opposite directions for trading on the stock exchange. In case of a breakdown – you need to play in the direction of the breakdown. In this option of trading, we hope to continue the momentum, planning to take a significant movement. It requires considerable skill for competent exit from the position – you need to choose the level of stop loss, as well as to determine when to take profit. It’s not always easy.
If you enter from a level, then in this case you hope that there will be no big movement, and the markets will push off the level and you will earn. It is necessary to exit the position when the level is broken. Many traders turn over-change the direction of the transaction.
Of course, one should always remember that the trader trades not predictions but opportunities. Therefore, the breakdown of the level is, first of all, an important indicator of some changes in the market. You should always be aware of the risks and how to control them, and that no signals and systems can give 100% guarantee.