One the the most fundamental aspects of trading is understanding support and resistance. Most people get discouraged by the amount of trading jargon there is to learn and often this keeps them from being successful. In this article I want to start off with providing an example of an active cryptocurrency that I have been trading. I honestly don’t care what this crypto or others claim they will do for the world, I only care about the tape or the chart when I am using technical analysis to take on trades. If I am interested in investing into a stock or cryptocurrency then I would want to understand more about what they provide and the potential earnings or disruption to a market. I would follow my research with technical analysis to try and pick a good entry and stop.
I have marked this chart to provide a nice visual of my explanations. Simply put support is a level at which the market feels comfortable buying and resistance is a point at which the market is selling. You would do well to take on trades at support levels and place stops below that level and you would also do well understanding resistance points because you can also take some profits here.
Stocks & Cryptocurrencies typically trade in ranges before they move higher out of that range (Breakout). If you notice in the chart I have provided I have three rectangles that are highlighting trading ranges. The top of the rectangles become resistance and the bottom of the rectangles become support. Typically to be able to determine a trading range you want to find two points (Candles) that meet the same or similar highs as well as the same or similar lows. All you need to do from there is draw your box around these points and you have a trading range.
In the case of BCPT/BTC you can see that it had three different Breakouts. One breakout was late December and is indicated on the chart as ‘Breakout 1’. If you notice the first candle that breaks through the top of the resistance is your buy signal. Notice that once this candle broke through resistance we now moved on to the next level higher and formed a new trading range. This trading range lasted about a week and then broke out to a upward parallel channel as indicated on the chart as ‘Breakout 2’. Again this candle breakout out of the rectangle trading range is your buy signal. The uptrend parallel channel didn’t last long and broke out as well which is indicated as ‘Breakout 3’ on the chart. This breakout is another buy signal and at this point you should be adding to your trade.
Breakout 3 formed our highest trading range yet which shows multiple Candle wicks (Extensions of the candle that reached a peak high or low price.) that attempted to breakout higher but failed. Within this trading range is a Bull Flag Pennant that we will discuss in a later analysis. If I were still in the trade and hadn’t sold any of my shares then I would be looking to reduce my position by at least 50% when it hit resistance from the 9th-10th of January and couldn’t break through.
Notice that around the 13th of January the crypto failed to hold support as indicated by ‘Breadown 1’. This should have been your immediate sell signal if you were in the trade. Anytime a major support level is broken you should be exiting the trade and in fact you would have been smart to have an alert and automatic stop placed below the support level.
We could go even deeper with this analysis and find other trading points like downtrend reversals and also perform a Fibonacci Retracement to see the expected retracement levels but we will discuss that in a future article. There are many ways to trade and they key is to learn the basics so you know when to enter and when to exit a trade.
I hope this was helpful and please feel free to comment below with any questions.
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Mark aka TheBossTrader