Homework tasks
What is the Support & Resistance zone?
Explain different types of Support & resistance with proper demonstration.
Identify The False & Successful Breakouts. (demonstrate with screenshots)
Use Volume and RSI Indicator Combined with Breakouts & Identify the Entry Point. (demonstrate with screenshots).
Take a Real Trade(crypto pair) on Your Account After a Successful Breakout. (transaction screenshot required).
Explain the Limitations of Support & Resistance (false breakout).
Conclusion.
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1. What is the Support & Resistance zone?
Support and resistance in technical analysis are one of the most discussed and prominent areas any trader is expected to learn to hone his/her technical analysis trading skills.
Support and resistance zones are market situations created by the interplay of buyers and sellers in the market and their reaction to price changes. These are areas well expected to bring about a rejection whenever price reacts with them and the number of times this similar market reaction occurs when met with a particular zone determines how strong such zone is.
Resistance Zones
Resistance zones are significant areas in a market structure which acts as a barrier and prevent price from closing above it. It can also be described as an area in an existing uptrend that is expected to bring about a market reversal when price reacts to it. This is due to a concentration of sellers in the market, a scenario where sellers outnumber buyers. A strong resistance zone is characterized by the number of times its able to cause a market rejection to the downside upon reaction with a price. This is also referred to as a major resistance zone and traders watch out for these zones closely by paying major attention to them.
Due to how popular the concept is, traders in a financial market watch closely for areas on the chart where such kind of rejection has occurred previously and in a situation where a potential resistance zone and market rejection has been observed, traders in the market would prepare to short the market whenever price approaches this zone. This could be in the form of multiple sell limit orders which would work to increase supply and push price down.
An illustration is marked in the ETH/USDT chart pair below
Illustration of resistance zones
Image gotten from trading view
Support Zones
Support zones are significant areas in the market where price has reached and failed to close below. It can be described as an area which acts as a barrier in an impulsive bearish structure causing a market reversal to the upside. This is due to the concentration of buyers in the market, a scenario where buyers outnumber sellers.
A strong support zone is characterized by the number of times its able to cause a market reaction to the upside upon reaction with price. This is also referred to as a major support zone.
Traders also watch out closely for this area of the chart and area prepared to long the market whenever price approached this zone. This could be in the form of multiple buy limit orders which would work to increase demand and push price up.
An illustration is marked in the ETH/USDT chart pair below:
Illlustration of support zones
image gotten from trading view
2. Explain different types of Support & resistance with proper demonstration.
Different support and resistance concepts exists in price analysis and they are all used in actively trading the market with each of them possesssing its method of application and requirements. The various support and resistance include:
1. Horizontal support and resistance
This is the most popular form of support and resistance and due to that it remains the most commonly used kind especially by beginner traders in the market. It is characterized by horizontal areas drawn up at zones which have caused market reactions (support and resistance zones) to display the bias of buyers and sellers in the market as displayed below.
Price can react to these zones in different ways, it could either reverse to the opposite direction or break the zone when in contact. The first scenario has been clearly established in its definition. However whenever a breakout occurs, it could again lead to a reversal to the intended direction afterward, this is used to characterize a situation known as fakeouts or it could break above or below a support or resistance zone and continue its impulsive move, this is in the case of a breakout.
In a breakout structure, the presence of flip zones can be seen as price goes through trend continuation. There will be a market overturn and a zone previously acting as support could become resistance and similarly a zone previously acting as resistance could become support when this happens. For example, whenever a breakout occurs at a resistance level, the broken resistance zone would be retested from above and automatically become a support zone which would ensure enough momentum to push price upwards and maintain the formation of higher highs and lows. This is in the case of a resistance turned support. This is observed in the chart pair below
Image gotten from trading view
Its noticed that a bullish price structure had begun to form with the existence of higher highs and lows in the market. Here the horizontal resistance marked turned to a horizontal support when price broke above this zone due to the high momentum that caused the spike.
Similarly, whenever a breakout occurs at a support level, the broken support level can be retested from below and automatically become a resistance zone which would ensure enough momentum to push price downwards and maintain the formation of lower highs and lows. This is in the case of a support turned resistance and a chart illustration of this market scenario is given below.
Image gotten from trading view
In the downtrend structure observed above, we notice the formation of lower highs and lower lows in the market. Horizontal support which has rejected price in previous scenarios has been marked out. However, the horizontal support turned to resistance when price broke below this zone and retested from below before trend continuation.
2- Slope Levels of Resistance and Support
Slope level support and resistance is another kind of support and resistance
characterized by the presence of a line drawn diagonally known as a trendline. This form of support and resistance trading is more effective in trending markets where a defined market condition exists(an uptrend or a downtrend).
In an uptrend the diagonal line connects the lows of an impulsive series of price movements beginning with the lowest point to the relatively highest point in the formation. At least, two lower high points should be connected to confirm the presence of a diagonal support.
An example of this is seen in the chart illustration below.
slope level suppport
image gotten from trading view
With respect to the LTC/USDT chart above, a bullish trendline that connected the lows of a persistent movement has been drawn out. Here the bullish trendline is serving as sloped support which brings about an impulsive rejection to the opposite direction whenever price makes a corrective move to this trendline.
In a downtrend, the sloped resistance is utilized to connect the respective lower high points. Similarly, at least two lower highs are required to confirm the existence of the sloped resistance line. A bearish trendline is used to indicate the downtrend price formation in the market and whenever price retrace to this zone, a rejection to the downside should be observed as shown in the chart illustration below.
illustration of sloped resistance
image gotten from trading view
These slope levels also represent the strength of an existing trend in the market and a slope level observed on a higher timeframe would be stronger and more effective than those observed on relatively smaller timeframes.
3- Dynamic Resistance and Support Levels
This is a kind of support resistance that is comprised of using a set of oscillating lines ( moving averages) which could serve as a potential pullback area for price to indicate the various dynamic support and resistance zones in the market. It's similar to a trendline with the main difference being its reaction to price and how it follows price closely. There are various ways to go about dynamic resistance and support trading using moving averages, a simple, smooth, or exponential moving average can be utilized with varying length periods. However, for this demonstration ill be making use of two exponential moving averages with 20 and 50 period respectively.
In a bullish market, whenever price breaks above a moving average with momentum and retraces back to it, the moving average is used as a dynamic support level from which price would bounce off to continue its bullish movement.
An example is seen in the illustration below where the exponential moving averages serve as dynamic support to the bullish price movement and rejection is spotted to the upside whenever price retraces to this dynamic support.
illustration of dynamic support
image gotten from trading view
Also, in a situation when price breaks below the moving average with momentum and retraces back to it for a retest, the moving average is used as a dynamic resistance level which would reject price and cause rejection to the downside whenever price retraces to this area as seen in the illustration below.
illustration of dynamic resistance
image gotten from trading view
3. Identify The False & Successful Breakouts
Breakouts in trading occur when price moves below or above a certain level which could be a resistance or support area. This scenario is often followed by momentum and indicates that a trend is about to continue or a reversal is about to happen. They are categorized into two
Successful breakouts
Fake breakouts
SUCCESSFUL BREAKOUTS
Successful breakouts occur when the movement of price near a predetermined area of interest led to the continuation of the existing market trend or a reversal to the opposite direction.
This form of breakout is further divided into two phases which are:
Continuation Breakout
Reversal Breakout
Continuation Breakout
Continuation breakout occurs when the movement of price near predetermined support or resistance leads to the continuation of the existing market trend followed by an increase in momentum in favor of the trend. For example, the price of an asset may be trading close to a resistance level, and with enough momentum in the market, the resistance level can be broken and price may continue with its bullish movement.
In many cases, after the resistance level is broken to the upside, price may retrace back to the previous resistance level to seek minor support before continuing with its upward movement.
An chart illustration of continuation breakout is given below
Image gotten from trading view
In the XRP/USD chart above, we observe a resistance area where price reacted to marked out resistance zone before breaking out to the upside with increased momentum. The new trend is confirmed when price retraces and retests the broken resistance from above before continuing its bullish move. This is a case of resistance turned support.
Reversal Breakouts
This is a kind of breakouts which occurs in the opposite direction of the previous trend in the market. This illustrates a change of hand in the market e.b buyers to sellers, sellers to buyers and often confirms the formation of a new trend.
i.e Price may be in a general state of uptrend as it continues to make higher high and higher low candlestick formation and soon price may fail to create another high which takes out the previous high indicating bullish exhaustion. This might lead to a change of trend in the market from uptrend to downtrend and the bearish trend is confirmed by price breaking out of a previous important zone such as the support zone given in the illustration below.
Here we observe that price broke below the determined support area and retested from below before continuing with its bearish movement.
Image gotten from trading view
FAKE/FALSE BREAKOUTS
False breakouts occur when price makes a temporary move above or below an important support or resistance zone but later makes a pull back to its original trading range. In other words, a breakout which is unable to continue beyond a level. This situation usually confuses traders by making them think a new trend is about to begin in the market or a new trading range is about to be established but ends up being false.
For example, in the illustration below, its observed that price made a move below the defined support level but couldn't continue with its bearish movement due to bullish pressures coming in leading to a fakeout below the support level upon candle close.
Image gotten from trading view
4. Use Volume and RSI Indicator Combined with Breakouts & Identify the Entry Point.
Identifying breakout entry points using volume and RSI indicator
With the use of support and resistance combined with indicators such as the volume and RSSI indicator, breakouts in the market can be traded by the determination of accurate entry and exit points.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) Indicator is a momentum indicator that helps to measure the volatility of price movements. It was developed by J. Welles Wilder to determine extreme situations in the market such as oversold and overbought signals.
The RSI indicator oscillates around the 0 and 100 levels. Once the indicator oscillates around the 70 region, it indicates an overbought situation which informs traders of an impending reversal to the downside, and conversely, when it enters the 30 thresholds it indicates an oversold situation which informs traders of an impending reversal to the upside.
Volume Indicator
The volume indicator is a technical analysis and sentimental analysis tool which helps to accurately predict big moves in the market due to rapid changes by measuring buying and selling pressures in the market and also show the sentiment of traders moving the market at a particular time.
When combining these indicator with breakout support and resistance trading, the following should be followed
- Firstly zooom out the chart and identify support and resistance zones in the market or go to a higher timeframe and mark out a level of interest of accumulation.
- Draw out the support resistance formed in the chart, it may be any of the three kinds pointed above.
- With the use of the RSI indicator, check the condition of the market. It can either be in an overbought or oversold condition which informs a trader of a potential move to the opposite direction.
- Having confirmed the market situation, wait for a breakout from marked area and confirm the breakout with the use of the volume indicator.
- Breakout followed by increased volume and momentum is valid and hence entry should be sought when price retests the broken area of interest (support or resistance) with effective risk management strategies employed.
An illustration is given below.
Image gotten from trading view
In the ETH/USDT chart pair above, an accumulation is spotted where price consolidated around a region. The RSI indicator was trading around the overbought region shortly before a long bearish candlestick breakout occurred outside the consolidation range. This movement was followed by increased volume and thus the breakout is confirmed by the volume indicator.
Price retreated to the broken support shortly after to make a retest before continuing with the bearish trend and entry was placed at this zone. We observe a good 1:3 trade using this strategy.
5. Take a Real Trade(crypto pair) on Your Account After a Successful Breakout.
Real trade order executed on binance
image gotten from trading view
For this trade, the concept of support and resistance as well as the Relative Strength Index (RSI) was used On the XRP/USDT chart below, 45 minutes timeframe. A resistance zone was observed on around 0.7290 and 0.7320, causing multiple rejections and creating a lot of price wicks.
Shortly after price gathered enough momentum to break above this zone to the upside and has retraced back for a retest. I waited until the retest is confirmed by a long bullish candlestick which had begin to form when price got to the broken resistance zone, now support. The RSI was also trading in the oversold region which means a move to the upside should be expected and thus with this confirmations, a buy trade was executed with risk management employed.
buy entry order placed using binance mobile exchange
6. Explain the Limitations of Support & Resistance (false breakout).
It's important to note that the market moves based on the sentiment of traders in the market and the influence of large investors therefore it's pertinent to note that the market may give some false movements once in a while and this is the limitation to support and resistance breakout trading.
Fakeouts in the intended direction as the current trend in the market may happen and this may confuse traders into thinking that the current trend is still valid and hence take trades based on this ideology however price may often lose its momentum after breakout and close above the support or below resistance back leaving traders in losing trades.
An example of a fakeout situation is given in the illustration below where the price made a bullish move above the resistance structure
Image gotten from trading view
However, there wasn't enough momentum to keep price going upwards so the long bullish candle that created the candle was exhausted by sellers in the market leading to the presence of a huge wick. In the second scenario, another illustration of a false break is seen. Here, price broke above the structure and failed on its retest as marked. This is followed by price returning to its trading zone below the resistance structure.
Therefore in other to not be fooled by fakeouts, its very important to confirm the breakout scenario by waiting for price to leave the support or resistance zone and make a successful retest before proceeding with its continuation. To do this effectively, technical indicators such as the RSI and volume indicator as explained by the crypto professor could be used. The usage of RSI indicator and volume indicator in confirmations of breakouts and determination of fakeouts is explained above.
Conclusion
Support and resistance remain a popular concept when referring to technical analysis in trading. Its created by the sentimental reaction of various traders whenever price approaches a particular area of interest and the ability to correctly decipher and trade these zones improves the profitability of a trader.
The crypto professor has done an excellent job of putting forward the concept of support and resistance trading as well as strategies to use to profit from this form of trading in a simple way. Thanks to the steemit team for the crypto academy, It's done far much in helping me tackle the markets one indicator/strategy at a time.