If you’ve been around the trading block a few times, you’ll probably know there is no Holy Grail in trading.
Maybe you’d be surprised if I told you Support & Resistance does come pretty close to that elusive Holy Grail.
The problem is Noobie traders are too busy getting distracted by the latest greatest trading toys, be they footprint charts, a shiny new indicator or a trading bot promising endless wealth.
If only they had spent more time understanding Support & Resistance, they may be a bit closer to actually making money.
So let’s get started with Support & Resistance…
A resistance level can be formed by one or more price swings. The more swings you can see on the chart, the better the level is going to be.
In this Ethereum (ETHUSD) 1 hour chart example, there are 5 swings, marked by numbers 1-5.
Notice when resistance is eventually broken, it becomes support.
Price Swings
Now, I want to clear up the definition of a “price swing” before we go any further…
You may be wondering why I marked 5 swings on the chart, even though the market touched that resistance level at least 6 times?
The answer is to do with space and distance. I want the market to move a fair distance from that resistance level before returning.
This time (on the chart below), notice the arrows indicating moves away and back to the resistance line. Where I have marked an “X”, there was only a tiny move away and hence we don’t count it as a swing.
Here’s another way to find price swings. On the same chart below, look at the space in-between swings. The larger spaces indicate the best swings.
The small space between points 4 and 3 is acceptable only because the market moved away a fair distance. There is hardly any space and distance between points 3 and X, hence we do not count “X” as a price swing.
Knowing how to identify price swings is the first step to drawing good levels. Some traders use indicators to determine price swings, but you’ll find they make too many errors. Nothing can beat the human brain and ability to see things graphically when it comes to charting!
Ok, let’s look at support levels now…
Revisiting that same chart, I’ve marked a support level comprising of 4 points. When support is broken, it becomes resistance, providing a trading opportunity.
Note that in this case above, I have used the nearest swing point (1) to place my line, but it would be equally valid to take an average of all the swing points.
Remember, these charts are formed by human emotions (and algos that were programmed by humans). We’re dealing with part art and part science here, and if you come from a computer or engineering background, try to cast aside any notion that we’re working in absolutes, i.e. binary 1’s or 0’s.
Price Pivot Zones
Finally, this is one of my favourite concepts for simplicity.
Often, support/resistance areas will become Pivot Zones (or equilibrium areas) that both repel and attract price. You can use this knowledge to your advantage to trade bounces at these areas.
Below is an example of a Pivot Zone on a daily Bitcoin (BTCUSD) chart. Notice how the markets reacts either side of this important level.
Train your eyes to spot these zones. Work from the right-hand side of the chart back to the left. Take an average of areas where price has formed swing points, fitting as many touches as possible.
Now look at the same chart below, but see where you could have bought or sold retests of this level for a profit.
Notice how the market often turns at the zone giving potential profit.
The best opportunities are when the market crosses the Pivot Zone and makes the first test back. You could still trade second and third tests back to a Price Pivot Zone, but be aware your win probability decreases after every test.
Finally, notice the circled area – price overshot the Pivot on a first test, and that’s why we use the 2nd Holy Grail of trading – good Risk Management!
Using good Risk Management will ensure that after the inevitable loss (or string of losses) your account gets to live another day.
Win At Cryptocurrency Trading
This article is an excerpt taken from the book Win At Cryptocurrency Trading by TraderSimon.
The principals in this book apply to all markets, but work especially well with Cryptocurrency.
If you ever “Rek’d” your trading account, bought a Crypto at the high (only to see it plummet) or got stopped out of a trade and then saw it turn and reach your original target… this book’s for you!
