Good day steemians, This is season 6 week 2 of the crypto academy and I'll be doing the task assigned by crypto professor @pelon53
TASK
1.- Explain in detail the advantages of locating supports and resistances on a chart before trading.
2.- Explain in your own words the breakout of supports and resistances, show screenshots for the breaking of a resistance, use another indicator as a filter.
3.- Show and explain the breakage of a support, use an additional indicator as a filter, show screenshots.
4.- Explain that it is a false break and how to avoid operating at that time. Show screenshots.
5.- On a demo account, execute a trade when there is a resistance break, do your analysis. Screenshots required.
6.- On a demo account, run a trade when there is a breakout of the support, do your analysis. Screenshots required.
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1.- Explain in detail the advantages of locating support and resistance on a chart before trading.
Support and resistance which happens to be a prominent aspect of technical analysis are basically areas which cause a market reersal whenever price reacts with them. This is due to the increased sentiment of traders at these levels which in turn leads to a change in the supply or overall demand of the market. A support area is found at the base of a price action and would often bring about a reversal to the upside whenever price comes in contact with these level due to increased buying pressure at this zone while a resistance is found above price action and would cause a reversal to the downside whenever price comes in contact with this level due to increased selling pressure.
Consider the illustration below. Here i have highlighted the support and resistance zone in the price action.
illustrating of support and resistance
- They help in determining entry points - By identifying support and resistance areas in chart. We are able to determine areas with high demand and support and hence open positions based on this information whenever price gets to this area.
- They help in determining exit points - In locating the appropriate place to set take profit and stop-loss points, support and resistance play an important role. This is because they are key levels that could bring about a change in market trend when the price comes in contact with them. For example, when taking a buy trade, the take profit should be set either below or just at the next resistance level. This is because the resistance level can turn the market around to the downside.
- Identification of market trend - There is more to support and resistance than the basic horizontal support and resistance zone. Another concept known as dynamic support and resistance exists and this kind helps in trend identification and also helps in the determination of potential entry and exit zones in a trending market. An example of a dynamic resistance used in the identification of market trend is given below
Identification of market trend using dynamic resistance
image gotten from trading view
To identify and trade breakouts - Support and resistance are useful in spotting breakouts in the market. Whenever price approaches a marked support or resistance level, a reversal is expected but in the situation when price breaks out of this area then traders can see the breakout easily and would therefore prepare to trade such breakout by anticipating a reversal to the broken level to pick up momentum and thus entry would be placed at this point with risk management measures effectively employed.
2.- Explain in your own words the breakout of support and resistance, show screenshots for the breakout of a resistance, use another indicator as a filter.
A breakout is a scenario in trading which occurs when price makes a move outside a defined support or resistance level. Breakout traders hope to catch this move by opening long trades whenever a resistance breakout occurs and short positions when a support breakout occurs therefore they are always on the lookout for such scenario.
1. Price breaks a support or resistance and returns to broken zone
This is one breakout structure which occurs whenever price breaks through a support or resistance area after ranging for a while and makes a pullback to retest the zone before continuing with its trend. This is a very popular form of breakout and is very much anticipated by most breakout traders.
An illustration is given below
In the chart above, its noticed that price pierced through the support area marked and proceeded to make a pullback to retest the broken support, now a resistance zone. At this point, a sell order would've been appropriate to open with risk management measures fully employed.
scenario 2 - price breaks out of structure and continues with trend
In this kind of breakout, price makes a move above or below a defined support or resistance structure and continues with its trend. Here price doesn't make a pullback to retest the broken level before trend continuation. This form of breakout is fueled by increased momentum and volatility in the market.
A chart illustration is given below.
breakout scenario 2 illustration
Image gotten from trading view
In the FTM/USDT chart above, the resistance structure has been marked and price has been respected this zone multiple times. However, a bullish momentum occurs and price breaks the resistance zone and continues with the uptrend. Shortly after price makes its retracement at point E on the chart before bullish trend continuation.
Scenario 3 - Price makes a false breakout and reverses to the opposite direction
This is another case of breakout which involves the illustration of fakeouts or false breakouts. This form of breakouts is common in the market and occurs during manipulations. It also occurs when price intends to take out liquidity before continuing with its intended trend.
An illustration of this scenario is given below:
scenario 3 breakout illustration
image gotten from trading view
In the SOL/USDT chart pair above, a defined support structure has been marked out. Shortly after a false breakout to the downside occur, this is followed by the presence of a bearish candle with a long wick. The intent of this candlestick is to take out liquidity in the form of stop losses that would have been placed by traders anticipating a reversal to the upside once price hits the support zone. Afterward, some doji candlesticks began to form indicating the indecison of the market and price again broke out to the downside, confusing many traders that a new bearish trend was about to begin. However it happened to be another false breakout, this is observed as price returned to the trading zone and made an impulsive bullish movement later.
To illustrate a resistance breakout, i'll be making use of the Moving Average Convergence Divergence (MACD) indicator and the Bollinger bands.
The MACD indicator is very useful identifying the intensity of bullish and bearish momentum with the use of its bar pattern and determination of entry and exit positions by making use of its crossover lines.
A resistance breakout occurs when the price of an asset breaks above a defined resistance structure. The breakout is confirmed by longer bullish candles upon breakout and increase in volume.
A resistance breakout is given below:
Illustration of resistance breakout
image gotten from trading view
On the FTM/USDT chart above, we observe a breakout above the resistance. This is a successful breakout because its confirmed by both the bollinger bands and the MACD indicator. The bullish candle tore above the upper bandof the bollinger band indicating increased momentum and the MACD indicator indicated a crossover signal followed by long green bars hence an entry could have been taken on the second candle after the breakout with risk management measures.
3.- Show and explain support breakout, use additional indicator as filter
.A support breakout occurs when the price of an asset/instrument breaks below a defined support level, its the opposite of a resistance breakout explained above and to illustrate this market scenario ill make use of the
Relative Strength Index indicator and the bollinger bands.
Support breakout illustration
image gotten from trading view
In the AAVE/USDT chart pair below, the support and resistance zone has been marked and price is seen trading close to the marked support zone. The RSI is trading at the overbought region and has begun to give off a bearish divergence signal hinting that price would reverse to the downside. Shortly after, a breakout to the downside which also broke through the lower band of the bollinger bands. This is an indication of strong bearish momentum and this move is confirmed when price retests the broken support from below before continuing with the trend.
4.- Explain what a false breakout is and how to avoid trading at that time. Show screenshots.
A false breakout occurs when price breaks through a defined support or resistance level but is unable to gain enough momentum to continue its movement and therefore retraces back to its trading range. This market scenario is often confusing for many traders and causes losses, this is because some traders would see this formation and place trades in anticipation of a price breakout and trend continuation only for price to hit their stop losses.
An illustration of a false breakout is given below:
illustration of a false breakout
screenshot gotten from trading view
In the SOL/USDT chart pair below, the existent support structure has been marked and we observed how price had been respecting the zone, unable to break below it. This is confirmed by the number of wicks subsequent candlesticks have created. Afterward, price gained enough momentum to break below the zone but was unable to continue its bearish momentum. Buyers at this zone stepped in and drove price further up taking out nearly half of the long bearish candlestick until price returned to the trading range.
This is an example of a false breakout or fakeout and a lot of traders would have placed sell orders hoping to catch a trend continuation bearish momentum early but would have ended up getting stopped out.
There are ways to avoid getting caught up in losing trades due to false breakouts. One of which is to adopt a more conservative way of trading and seek confirmations whenever a breakout occurs in the market.
This could be in the practice of seeking pullbacks to the broken level and awaiting a successful retest of the zone before trend continuation. Another way to go about this is to make use of confirmation indicators like the volume indicator to confirm if an increase in volume in favor of the breakout has occurred.
5.- On a demo account, execute a trade when there is a resistance breakout, do your analysis.
For this question, ill be performing a demo trade using the trading view paper trading on a 15 minute timeframe of RUNE/USDT
In this trade. I've marked out a resistance level which price struggled to break above for a while. Shortly after a long bullish candle broke through this zone and made an impulsive move before retracing to the resistance zone to retest. Once rejection of the broken resistance zone waa spotted a buy entry was entered on the second candle after rejection with risk management measures as shown below.'
Demo trade of resistance breakout
image gotten from trading view
6.- On a demo account, execute a trade when there is a support breakout, do your analysis.
For this question, ill be performing a demo trade using the trading view paper trading on a 30 minute timeframe of FTM/USDT.
In this trade, I've marked out a support level which price freshly broke out from. It was a valid breakout as price retraced back to retest the zone but couldn't find enough momentum push to the downside. This led to a second retest of the broken support and at this area a buy entry was taken when a bearish rejection candlestick began to form with risk management strategies effectively employed.
Demo trade of support breakout
image gotten from trading view
7. 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.