Support and resistance are fundamental concepts to almost all cryptocurrency trading strategies. They have a profound psychological background and market behavior behind them, and even if you don’t fully understand the reasoning, the acceptance of most traders makes support and resistance a self-fulfilling mechanism.
The anxiety of buyers and sellers interweaves near the support and resistance lines, leading to changes in cyclical trends. As we often say: shorting at pressure levels and going long at support levels are more likely to make money.
Let’s discuss this below. Feel free to point out if I’ve said anything wrong!
1. The concept of support and resistance
The so-called support and resistance of a currency refers to the tendency of the price not to break through or rebound at the support and resistance positions. It can be horizontal or inclined. The peaks and troughs we often talk about also represent support and resistance.
The more times support and resistance are touched and bounced, the more important this position becomes.
2. Refine support and resistance: support and resistance levels
When the resistance and support of a currency is not a definite line, but a small area, within this range, the price tends not to break through or rebound, which can be horizontal or inclined.
Likewise, the more times a support or resistance level is touched and bounces off, the more important that level becomes.
3. Support and resistance lines, and how to draw them
When we use support and resistance as a specific core indicator of operation, if we cannot determine a clear price, then our rules for opening or closing positions are vague. For example, a rule is as follows:
Open a long position after breaking through the support line
Newbies like to write such rules, so let me ask you:
How do you draw your support line? Is it drawn by the highest and lowest prices, the closing price, or the opening price?
Should I place the order at the support line or at the closing price?
How to define a breakthrough? Is a shadow breakthrough also a breakthrough? Or is it a closing price breakthrough?
Although the support and resistance levels are a range, when it comes to specific operations, that is, trading points, we still have to concretize it to a fixed price. At this time, the support and resistance levels are no longer a range, but a line.
Generally speaking, there are two more practical methods:
Method 1: Draw support and resistance lines based on the highest or lowest price, or draw peaks and troughs
Method 2: Draw support and resistance lines based on closing or opening prices, or draw peaks and troughs
If you use the pending order breakthrough method to enter the market, the differences between the two methods are as follows:
Cost: Method 1 > Method 2, that is, if the position is successfully closed later, Method 2 will make more profit and Method 1 will make less profit
Risk: Method 1 > Method 2, that is, if the pending order is executed but stopped out, Method 1 will result in a larger loss, while Method 2 will result in a smaller loss (calculated based on a fixed position size, if the percentage method is used, then the risk is the same)
If you use the closing price breakthrough entry method to enter the market, the differences between the two methods are as follows:
Cost: Method 1 > Method 2, that is, if the position is successfully closed later, Method 2 will make more profit and Method 1 will make less profit
Risk: Method 1 > Method 2, that is, if the pending order is executed but stopped out, Method 1 will result in a larger loss, while Method 2 will result in a smaller loss (calculated based on a fixed position size, if the percentage method is used, then the risk is the same)
Success rate: Method 1 > Method 2. If the closing price can break through the higher or lower shadow price and then trade, it means that the price has a stronger momentum in that direction.
Based on the above analysis of advantages and disadvantages, you can weigh the pros and cons (which one is more suitable for your personality, do you want to sacrifice a little profit in exchange for a higher winning rate?), and choose one. Note that there is no right or wrong, and both methods are mainstream methods. Of course, the author will also analyze the selling pressure and the macro level of the BTC market and draw the pressure and support levels in combination with the market maker style.
