Learn to Trade; OH sh*t, I can’t believe its free! Part 3.
By Trader Fibonacci Fiddsy
If you missed Part 2 of Learn to Trade; OH sh*t, I can’t believe its free!, click the link below to head back. Within part 2 will be a link to part 1 if you also missed the beginning of the series!
SUPPORT AND RESISTANCE
Now we are getting into the juicy stuff! I mentioned in both Part 1 and Part 2 that the basics of trading is buying support and selling resistance, hopefully by now I have drilled that into your head by multiple repeating's! The content in this article is going to be your foundation of trading.
So what is support and resistance?
All support and resistance levels are psychological price points/levels mostly based off historical price action, where investors and/or traders see (or have seen in the past) value in buying or selling.
Support is a psychological price level that traders and investors will buy at. Alternatively, Resistance is a psychological price level that traders and investors will sell at.
It’s important to note that when resistance is broken in an uptrend, that resistance level often flips and becomes a level of support. Visa versa in a down trend. If support is broken, the support often flips and becomes a level of resistance.
So just remember.. Resistance & Support will act as a barrier for price. The very general rule is that when the level is broken, it will become the opposite of what it was before it was broken.
There are multiple types, tools and indicators that are commonly used that identify and even create these areas, here we will talk about the most common ways and indicators used to identify these areas in Part 3 and Part 4. So lets get started with possibly the most obvious psychological level of support and resistance!
BIG ROUND NUMBERS!
Yep, seems obvious enough but never underestimate the power of BIG ROUND NUMBERS!
See below the daily chart — each single candle represents a day of price action for BTC (Bitcoin). I’ve quite simply drawn in $10,000 increments from $10,000 USD to $60,000 USD for the past 5 years.
$10,000 — $20,000 — $30,000 — $40,000 — $50,000 — $60,000 USD/BTC Daily Chart
As you can see, these BIG ROUND NUMBERS have acted as barriers for support or resistance multiple times on the daily candles. If we were to zoom in on lower time frames, we would see even larger amounts of price action using these areas/levels as support and resistance.
$10,000 level on the USD/BTC Daily Chart
Sticking with Bitcoin on the daily, lets have a closer at the $10,000 USD. If you look closely at the chart, you should be able to notice that resistance has flipped to support, support has flipped to resistance and so on, multiple times throughout this time period. Its one of my favourite examples to use because the 10k level has acted as a ‘long term’ barrier.
$20,000 Level on the USD/BTC Daily Chart
Now lets have a closer look at the $20,000 USD. Bitcoin hit just below $20,000 in late 2017 — the peak of the 2017/18 bull run, it wasn’t until late 2020 that this price level was revisited and retested which acted as resistance several days before breaking through. In mid 2022, price revisited this area again and it acted as support on multiple occasions. That support once broken became resistance and eventually when it was broken in early 2023, it flipped and became support on the 10th of March 2023.
$30,000 Level on the USD/BTC Daily Chart
LTC/USD on the Daily Chart — Increments of $50 USD
Big round numbers don’t need to be hundreds or thousands of dollars! On this chart we have Litecoin on the daily, where “large” round numbers are in increments of $50 USD. These increments have acted as resistance and support, just how $10,000 USD increments did with BTC.
Its clear from the chart above that the $150 & $200 USD levels are very strong historical levels for both support and resistance! However, I’ll focus on the $50 USD and $100 USD chart below for simplicity and.. for room! And yes, I didn’t bother to label every test and flip but hopefully by now.. You get the idea!
DOGE/USD on the 8 hourly Chart — Increments of 1 cent / $0.01 USD
As you can see in the chart below, once again, BIG ROUND NUMBERS are relative to the coin/chart we are viewing. 1 cent / $0.01 USD is hardly a “big” number and that number can be rather ‘subjective’ because it is a large number for Doge. As shown here, it proves again and again that these psychological levels play out!
Now what?
The honest truth is most people are lazy. Most people will put buy or sell limit orders at these big round numbers. The mass amount of orders that get placed at and around these psychological areas/levels is what creates the price barrier — This means that there’s a large amount of liquidity at these levels, this creates liquidity zones — We’ll come back to liquidity zones further down.
If we look back at Litecoin as an example — and we were looking to buy at $50 and sell at $100, our best bet of making sure our orders get filled would be to place the buy order a little bit above $50 and our sell orders a little bit below $100. This would increase our odds of having our orders filled. So as an example, we’d place our buy at $50.17? and our sell at $99.86? Obviously, we are not the only ones putting orders/liquidity slightly before these levels and in fact, that is why you often see price just fall short of those big round numbers.. Because other traders and smarter investors will also have their buy and sell limit orders before those levels, therefore increasing the amount of liquidity in the zones around those barrier levels.
Horizontal Support and Resistance!
Horizontal support and resistance in my mind is probably the most important and most common. Honestly, we have already covered 95% with the charts above showing horizontal support and resistance at big round numbers. Those big round numbers ARE horizontal support and resistance levels.
However, horizontal support and resistance doesn't have to be at big round numbers, it can be any price that has been tested multiple times, which in turn, has then acted as support and/or resistance. The more times the level has historically been tested, the stronger that level will be.
Its important to note that my examples show longer term levels but other levels can be found on shorter ‘historical’ periods of time and on shorter candle time frames as well.
So lets lets quickly punch out a couple more examples!
BTC/USD Daily Chart — $38,000-$38,200
As with most daily charts, there is a fair few price levels which can be drawn in on this chart but this is a great example of $38,000 to $38,200 acting as strong resistance and support for well over a year.
BTC/USD on the Daily Chart — $7,700-$7,800
Again, a really clear long term (two and a half years) horizontal support and resistance level.
LTC/USD on the Daily Chart — Roughly $54 & $63.30
Around 10 months of price action at these levels.
XRP/USD on the Daily Chart — $0.2858
Here we have an excellent example that will work seamlessly into the next section — Liquidity zones! But again, you can see a clear multi year horizontal level that isn't on a big round number.
Liquidity Zones!
Earlier I mentioned Liquidity Zones, which I summed up as area’s and zones around horizontal support and resistance levels where there are, or has been, lots of price action & orders.
The more universal definition is — An area or zone where there is a high concentration of buyers and sellers.
These are drawn easiest by identify periods of time where there has generally been a lot of ‘tight’ price action, often between two close horizontal support and resistance levels or around one long term strong level.
XRP/USD on the Daily Chart — $0.2858 to roughly $0.32
Using the $0.2858 level drawn in from the chart above, I have added a secondary level around $0.32 and shaded in the liquidity zone. This zone is either side of the $0.30 big round number level!
XRP/USD on the 4 Hourly Chart
I’ve zoomed in on a section of the liquidity zone I drew on the daily chart above this and dropped the time frame to 4 hourly candles. I also drew in the $0.30 horizontal support and resistance level.
This should give a more clear indication of the liquidity zone and how it works.
How to use liquidity zones!
If you are day trading or even swing trading, you can quite simply buy the bottom of the liquidity zone and sell at the top of the liquidity zone. If you are margin trading, you can then short the top of the liquidity zone and take profit at the bottom. Just keep repeating this process until the liquidity zone is broken. You could have easily had half a dozen to a dozen successful trades on the 4 hourly chart above.
For long term trades or even for investing, liquidity zones are excellent areas to start scaling in or out of a trades/holdings.
While this next chart is not my actual trading chart, it is also completely stripped back and only has few of liquidity zones drawn in, I actually did personally use these levels in the 2021/2022 bull run.
The short version is — I was long from the bottom liquidity zone to the top liquidity zone were I took profit on a lot of trades, I then started shorting from the top liquidity zone all the way down to $17,000. I took profit on longer term trades at key levels of support and liquidity zones on the way down.
The long version!
I drew the liquidity zones in around March 2021 expecting a major pull back. I wasn’t only using liquidity zones for my targets but I had been slowly scaling out of my long-term holdings bought from 2018/2019. I was also swing and day trading majority long — up until April 2021 because I was very bullish. Charts do not go in a straight line and while I wasn’t looking to short the market as things were still parabolic, I was looking for re-entry on a lot of my long-term holdings while also planning for a major retrace.
When the huge crash/retrace happened, I started scaling back in my long-term holdings through both liquidity zones from $37,000 down to $29,000. Unfortunately, I was not trading short from the 2021 peak but I did start doing large leveraged longs from the lower liquidity zone —$32,000 to $29,000. These trades ended up being some of my largest and most profitable trades I have ever made. My targets were the top liquidity zone, $68,000 and other layered zones up to $84,000.
I wasn't trading short until the low end of the top liquidity zone was broken in December 2021. When it was, I started shorting the market till recently, the start of 2023. I should note, I wasn't completely bearish until $48,000 support was broken, at that point I sold the remainder of my long-term holdings.
UP NEXT — Part 4!
Part 4 is a continuation of support and resistance, but we’ll be looking at trend lines and a few common indicators and tools that also act as support and resistance levels — EMAs/MAs (Exponential Moving Averages/Moving averages) and Fibonacci Retracement levels.
DISCLAIMER
NOT FINANCIAL ADVICE– The Information in this article, learn to trade; Part 3 of my ‘OH sh*t, I can’t believe its free!’ series, is provided for educational, informational, and entertainment purposes only. The Information contained in or provided from or through this article is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice.
The Information in this article is general in nature and is not specific to you the user or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented in this article without undertaking independent due diligence and consultation with a professional broker or financial advisory.
You understand that you are using any and all Information available on or through this article at your own risk.
RISK STATEMENT– The trading of Bitcoin, alternative cryptocurrencies has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice.
