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Trading 101

Trading 101: Charting Tools I: Support and Resistance Levels

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So far, we have been looking at trends and the structure of trends in financial markets that are essential in understanding how asset prices move. We also got a glimpse of the art of charting, the visual representation of prices. Now that you have the basic knowledge, we will give you more tools to tweak your trading, while helping you in finding precise entry and exit points. First, we will take a look at support and resistance levels.

Significant Price Levels and the Memory of Markets

Important levels in the DOW Jones Index, Daily Chart

Everyone who is involved in trading and investing is familiar in one way or another with some of the most iconic levels of the major assets. The $100 per barrel level in crude oil, the DOW 10,000 or 20,000, the 1.00 level in the EUR/USD currency pair—all of these have sparked emotions worldwide, triggering euphoric or apocalyptic visions of profits, inflation, or even wars.

This level of attention and emotion creates extreme situations in markets, but if you take a step back and look at the phenomenon objectively, you will realize that it is the opposite of extreme—it’s perfectly normal. We, humans, use anchors to help us in navigating in the world; it’s just natural that round numbers and special levels have a prominent role in financial markets. This role usually means that more than average players are selling or buying at those levels, creating resistance and support levels respectively.

So what kind of special levels are there exactly? Here is a list containing the most important ones:

  • Round numbers
  • Previous swing highs and swing lows
  • All-time highs and all-time lows
  • Previous opening and closing prices
  • Fibonacci-levels
  • Range projections

The “memory” of the markets means that previously important levels (like extreme points in the price of assets) will remain later on. Of course, this effect might get weaker by time, but sometimes certain levels from years and years earlier retain their role as support or resistance levels. You probably noticed the previously mentioned swing highs and swing lows in the list and, of course, all-time highs and lows are also swing highs and lows by definition. This could shed more light on why those highs and lows are crucial in swing trading strategies.

Out of these levels, Fibonacci levels and range projections need some explanation. We will talk about range projections in the second half of this post, but for now, for those who don’t know them, “Fibo” levels are “natural” retracements and extensions for a given price movement. They are calculated using Fibonacci numbers and the Golden Ratio that is found everywhere in nature from the shape of galaxies to the geometry of plants. Later on, we will dedicate a whole post to Fibonacci levels.

Using Support and Retracement Levels in Trading

Support and resistance levels are very versatile tools that can be used for both primary and secondary trading signals. The basic premise of these levels is that there is a significant amount of buying power or supply concentrated near them. When the price of an asset gets close to these levels, they “test” the power of the trend with that additional demand or supply.

What does this mean for you as a trader? These levels are possible turning or breaking points that generally lead to heavy trading, significant moves, and sometimes major trend reversals. It is important to note that the underlying trend always deserves priority—in an uptrend support, zones generally hold, resistance zones generally fail. Just because an uptrend runs into resistance or a downtrending asset finds support, the trend won’t change. That said, if other clues suggest a trend change, these levels frequently provide the trigger for the reversal.

Primary Signals

Break-out trades in an uptrend

Using these levels to enter a trade is the most effective in the direction of the prevailing trend. As an example, if an asset is in a counter-trend move within an uptrend, a nearby support level could be a good place to buy the asset. Also, if the same asset breaks through a strong resistance zone (see the chart above), it is likely that the trend will continue (of course other factors should be considered as well).

To understand this even more, imagine those traders who are speculating on a trend reversal using the said resistance level. Those players will likely exit their positions as the price rises above the resistance, actually providing additional buying for the asset! That’s why break-outs often lead to explosive moves in uptrends, while support breaks lead to steep losses in downtrends.

Secondary Signals

Support and resistance levels are also great to select optimal profit-taking and stop-loss orders. Using an uptrend as an example again, if the price of the asset drops below a certain support level that sometimes means that the trend is weakening, at least short-term. Also, if the price approaches a resistance zone, the odds for a correction increase, possibly justifying taking profits, or fully exiting the position depending on other factors.

Trading Ranges and Range Projections

As we stated previously, asset prices spend a lot of time in neutral trends, trading without a clear direction. These consolidation phases mainly happen in trading ranges or other consolidation patterns. A trading range is a zone that is bordered by generic horizontal resistance and support levels. Other consolidation patterns might have different shapes, such as triangles and wedges. We will dive deep into these chart formations in our next posts.

The “classic” range consolidation is a great formation for trend-following strategies, as the borders of the range provide easy-to-identify primary and secondary signals for traders. Another important usage of these ranges is range projection, a technique to identify trading targets using the size of the trading range.

How does that work in practice? The most common method is to project the size of the range in the direction of the break-out and set trading targets according to this possible new resistance or support level. The memory of the markets, in this case, means that traders and trading robots are “used to” the prior size of movements, and as the price approaches the projected level they will assume that the movement will soon end, which will be also suggested by a lot of indicators that were “calibrated” in the prior range (we will explain this effect later on in our posts on indicators).

An example of the range projection method

These projections are usually more effective in the case of long-lasting trading ranges. Also, sometimes it is useful to use secondary range projections as well, doubling the size of the original range, as resistance levels frequently develop near these projections.

False Signals

As it’s the case with everything in trading, support and resistance levels are not perfect. A lot of times (especially in the days of trading algorithms) the price “overshoots” these levels, as trading robots go wild near these key points. These spikes sometimes lead to false break-out or break-down signals. The good news is that if you are aware of this process, you will be able to benefit from it, even if sometimes you will inevitably be the victim of these “traps”.

Again, respecting the prevailing trend is vital. False break-outs above resistance levels are much more likely to happen in a downtrend than an uptrend, and similarly, break-downs in uptrends are not to be trusted, as they commonly prove to be bear-traps.

False signals in a trading range, within an uptrend

When you are using these levels for trading, especially as secondary signals, it is often a good idea to leave some ground for these false moves by setting the stop-loss or profit taking orders, a bit away from the exact support or resistance levels. Also, buying an asset after a false break-down, or shorting it after a false break-out, is among the highest probability trades out there as those who got trapped will likely exit their positions as the market moves against them.

In our next post on charting, we will take a look at some notable chart formations including tops, bottoms, consolidation patterns, and much much more.

Previous article: 10 Essential Trading Rules for Rookies

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 465 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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4 Comments

4 Comments

  1. vjnunez

    April 29, 2017 at 8:01 pm

    Love this series of 101 trading, keep them coming 😉

    • Mate Cser

      April 30, 2017 at 3:04 am

      Thanks! Great to hear that you enjoy the series! Stay tuned for much more!

  2. sambkf

    May 4, 2017 at 10:23 pm

    Great post again. Technical however easy to access !

    • Mate Cser

      May 5, 2017 at 12:46 am

      Thank you for your comments, and of course, if you have any questions, don’t hesitate to ask!

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Op-Ed

Crypto Investors: Be Aware of Your Trading Options

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It helps to get the work done early so when you do hear of a project you’re interested in, you can get your money in it fast rather than finding out your preferred exchange doesn’t have access to it. I try to treat this as an opportunity to examine your trading processes, and find out if there is a better option for managing your money.

Developing a Holistic System

One thing I’ve talked about before, but bears repeating is that systems matter and a lot of money can be saved over time if you are repeating something enough. Once in a while, it pays off to do some additional research that will save you a compounding amount of money over time.

First, you must go through a realization, depending on the cryptocurrency, there might be a different option that serves you better. No exchange will be “best” in all categories or situations. Knowing this, you would want to plot out a preference chart that tells you when you would use each of them, or at least compare each time.

Your goal should always be to get a cryptocurrency while paying the lowest amount of fees (but without investing a significant amount of time in facilitating the purchase). I don’t think any of us are dealing with the sort of money that would justify spending a few hours verifying with a niche exchange just for the lowest possible fee.

Examining Options

Centralized exchanges are, as the name would suggest, run by centralized entities and have all the benefits and costs that come with that. You will generally find that Binance has most coins, and for those that are not listed there, you have Bittrex.

Where you’ll really get hurt here is when you are trading altcoin for altcoin and can’t find an exchange that has both. Then you’ll need to send BTC from one exchange to the other in order to make your purchase after making the first sale.

This can result in 5 different transactions (assuming you count the initial deposit from your wallet and final withdrawal to your wallet). The resulting fees can be quite high (almost 10%).

Further Experiments

Once you move on from centralized exchanges, you encounter exchanges that are more decentralized and have lower fees, but also offer lower liquidity. Kyber Network is one exchange I’ve experimented with, and although it has slightly lower fees, the GAS costs occasionally end up being higher. It is considered to be more decentralized but not fully decentralized.

Decentralization is usually determined by the classification of the order books and who holds the liquidity. Some exchanges carry an inventory or “liquidity pool” and others will facilitate trades between buyers/sellers. As you would guess, the former commands more costs which are then passed onto traders.

I eventually tried experiment with Faast (further along on the decentralized spectrum) that ended up being the cheapest, but one trial is never enough to come to final conclusions. The point of all of this is it took me a few hours, but yielded some solid insights as to which exchanges will save me money and where I should check prices first. From now on, I will look at Kyber and Faast as first options, and then move to more centralized options if I think they’ll be cheaper or better.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Trading 101

Insights Into Bitcoin Futures Contracts: Part 2

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Bitcoin futures

This article is the second piece dedicated to explaining bitcoin futures and how they impact the underlying price of BTC.

Periods of Validity

Bitcoin futures are instruments with a limited maturity date. Each contract has its own maturity date (the date of completion of the transaction), after which the contract is considered invalid. According to the validity period, futures are divided into quarterly and serial.

Most futures are quarterly futures. These are standardized contracts for the purchase/sale of transaction objects that are executed in the last month of each season. The last trading day, as a rule, falls on the period from the 15th to the 20th day of each last quarterly month and is indicated by the following symbols:

H – March
M – June
U – September
Z – December

Serial futures are intermediate contracts whose maturity date falls on any other month of the year that is different from the last quarterly. The last trading day of such futures, as a rule, falls on the third Friday of the month. The closing date of the contract is specified in the specification of the futures agreement.

Bitcoin futures present on CME and CBOE and have their own expiration dates:

  • For CME contracts, this is the last Friday of the month or the day preceding it if a holiday falls;
  • For CBOE contracts, the expiration date is the second business day before the third Friday of the month.

Futures Trading Terms

In 2018, direct work with Bitcoin futures is supported on several cryptocurrency exchanges, including OKCoin and BitMEX. As Hacked reported, during the height of the recent downturn, transaction volumes on BitMEX surged to over 40% of the entire market.

If you want to trade Bitcoin futures on regulated platforms through an intermediary broker, you can choose one of two exchanges: CBOE and CME.

Sellers and buyers enter into a contract with the exchange, and all further interactions between them pass through the clearing house of the exchange. Futures trading in Bitcoins consists of three stages:

  1. Entry into the position: At this step, the trader, buying futures, predicts the movement of cryptocurrency value.
  2. Waiting stage: When the trader’s forecast is correct, and the value of the asset moves in the right direction, he chooses the most appropriate moment to close his position. If the forecast is not correct, then the trader must determine the moment when you can leave the market, having suffered minimal losses.
  3. Closing Stage: This is the last stage of futures trading, in which the futures holder sells a contract and fixes its profit or loss.

When futures are bought, the trader pays only the exchange commission and pays the security amount for the contract. Usually, the size of the security collateral is in the range of 4-10% of the amount of the futures agreement. Due to the strong volatility of cryptocurrency, for bitcoin futures, the size of the collateral is always increased and can reach up to 30-50%, but average is 10-20%. The less financial risks, the less will be the size of the collateral amount.

One unit of trading on the CBOE exchange is equal to 1 bitcoin (XBT ticker), and the size of the futures contract on the CME platform consists of 5 bitcoins (BTC ticker). Bitcoin futures is a settlement type of contract, and the execution takes place by determining the difference between the cost of opening a position and the value of the settlement index on the day the futures are closed. Financial indexes are administered by a special party.

How to Trade

Bitcoin futures trading does not have any particular secrets or differences from other trading instruments. The scenario is the same as in the use of other trading tools: to make a profit, you need to predict which direction the bitcoin price will go. You build a forecast for a certain period of time and buy a futures contract.

For example, the most straightforward scheme for using a Bitcoin futures contract looks like this: knowing that the cost of bitcoin will go up, at the time of writing you can buy two-month futures for 10 bitcoins at the price of $4,000 USD. If your predictions come true, and the cost of BTC really goes up, you just have to follow Bitcoin quotes in the market. If during the contract term, the price of Bitcoin rises to $4,500, you can sell futures without waiting for the maturity date and earn your $ 5,000 ($500 profit x 10 bitcoins).

You can get such a profit without Bitcoin futures; it is enough to actually buy 10 Bitcoins and wait for the quotes change in the right direction. But in this case, you will have to operate on the full value of the asset: 10 x $4,000 = $40,000. But when buying Bitcoin futures, you will need to pay only brokerage fees and pay a deposit of 10-20% on average of the futures amount ($4,000-$8,000).

As with any trading instrument, futures trading requires not only basic financial literacy but also a balanced approach to planning, analyzing and attention to details. You should study well all the conditions of the exchange, the schedule of its work, commission, fees, etc.

In order to be able to enter into a futures contract, you will need to open a brokerage account, and each exchange independently decides whether it will allow you to trade on its site or not. Margin requirements are also set by the brokers themselves.

Many trading platforms can protect assets from sudden changes in their value in various ways. For example, on the CBOE exchange, there are such rules for suspension of trading, when the price of cryptocurrency begins to change dramatically. In particular: if the cost quickly rises or falls 10%, then the trades will be stopped for 2 minutes; if the course rises or falls by 20%, the use of the financial instrument will be stopped for 5 minutes.

Futures prices also have different price formations. For example, CME sets prices, taking into account data from the crypto exchanges platforms Bitstamp, Kraken, Coinbase Pro, and ItBit, and CBOE forms the value of the futures contract, starting from the exchange rate on the Gemini exchange.

The Impact of Futures on the Bitcoin Price

There are some concerns that bitcoin futures can be used for aggressive trading. However, if the value of such contracts went out of control, then arbitrators would have intervened.

Bitcoin futures are speculative instruments that allow you to influence the value of BTC without even owning it. Critics, including some from the futures industry, argue that such contracts are premature and, in the worst case, represent a systemic risk, given the underlying volatility of the crypto market.

However, the use of futures on Bitcoin has two significant consequences:

  1. Bitcoin futures, unlike cryptocurrency itself, can be traded on regulated exchanges and this is excellent news for traders concerned about the lack of regulators in the field of digital money.
  2. New trading tools open up opportunities for using Bitcoin in areas where cryptocurrency trading is prohibited. And this will open the door to broader participation in the cryptocurrency market of giant companies and investors from different countries.

Futures contracts will bring more liquidity to the market, which, in turn, will simplify the conduct of operations with cryptocurrency and make trade more profitable. Their use is primarily intended to balance price fluctuations in underlying assets.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.9 stars on average, based on 43 rated postsVladislav Semjonov has a legal and financial background. He has been involved in crypto space since early 2017 in both ICO advising positions in several ICO consultancy firms, and as an ICO analyst for VC. He began contributing for Hacked.com in April 2017.




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Trading 101

Insights Into Bitcoin Futures Contracts: Part 1

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Bitcoin futures

In December last year, Bitcoin achieved an all-time high of around $20,000 USD. One of the main factors that influenced such a price increase was the introduction of a futures contract on Bitcoin. Although the gains largely preceded the launch of the futures contract, they were partly driven on expectations of a new derivatives product being offered by CBOE/CME. In this article, I will try to explain the principle of a futures contract and how it can impact bitcoin’s price.

On 10th December 2017, CME Group launched trading in bitcoin futures, and a week later such actions were carried out by its competitor Cboe Global Markets.

The launch of CME futures has increased the legal status of cryptocurrency and has also boosted investor interest in the digital asset. The key question here is: how can this instrument make you additional money?

What are Futures Contracts?

In the world of trading, there are many different ways to buy and sell assets on exchanges, and some of them are very risky, such as margin trading. Futures contracts are a way to transfer risk, depending on how aggressively you want to trade. This concept is not new, as it has existed for decades and now applies to Bitcoin.

A Bitcoin futures contract is an agreement between two parties to a transaction that buys or sells BTC at a predetermined price at a future date. That is, the futures buyer acquires the right to sell BTC coins in the future at a fixed rate, and the futures seller announces his consent to accept the cryptocurrency on the settlement date at a fixed price.

History of Futures

The idea of creating futures contracts was initially to protect manufacturers and suppliers from sudden or significant fluctuations in commodity prices. This is a written agreement that determines the size (quantity), cost, evaluation (quality) and conditions for delivery of the goods on a specific date in the future. These instruments are traded (bought and sold) between producers, dealers or speculators (i.e., traders seeking to profit from price movements).

The first registered commodity futures transactions for the sale of rice occurred at the beginning of the XVII century in Japan. These contracts also made their way to the United States in the early 1800s when many agricultural products began to be produced. Most of these products had a limited shelf life, and the quality of stored products usually deteriorated over time, so the prices could vary significantly. Therefore, the first contracts for the future price appeared, which allowed the seller to get money for the goods before delivery.

The first American exchange was established in 1848 and was called the Chicago Board of Trade (CBOT). Its creation was preceded by the emergence of railways and telegraph, which connected the trading center with the agricultural market.

A group of brokers working in this council was able to establish a standardized and more efficient method of exchanging goods, thanks to the launch of futures contracts on the exchange. Instead of managing numerous individual agreements between interested parties, they developed futures that were identical in terms of asset quality, delivery dates, and conditions, and simplified the entire process of buying and selling future supply at the current price.

How Do Futures Contracts Work?

In practice, futures contracts look like this. For example, a farmer concludes futures agreement with a dealer that he will supply him with 10 tons of corn in early August. Both parties to the transaction receive their “guarantee” – the farmer will be paid a certain amount for the corn, and the dealer fixes his buying price in the future.

Such agreements became very widespread, and are even used as collateral for bank loans and can also be transferred. If the farmer decided that he will not sell his corn, he can directly sell his contract to another farmer. A dealer may also do so;  if his plans have changed and he no longer needs corn, he can always resell his futures on the exchange to another intermediary.

In Bitcoin futures, you also fix the price and a certain number of coins that will be sold or bought in the future. It is a tool to transfer or accept the risk. Parties to the agreements may take different positions:

  1. Buyers who have a hope to buy coins at a better price when the value of the asset increases enter into a trade from a long position.
  2. The selling side works from a short position, which will be able to get a more attractive price in the future, having successfully sold its product when its value starts to go down.

On the trading floor futures contract can be used throughout the duration. The parties may also place money in escrow to reduce the risk of the counterparty during the term of the futures contract. This is usually done only when the price begins to show strong movement to a long or short position held either by the buyer or the seller.

Types of Futures

There are two separate types of futures contracts:

  • Physical delivery futures, which are an agreement for a specific asset that will be transferred at the end of the term of the futures. An asset can be any commodity or money (oil, grain, cryptocurrency, gold, etc.).
  • Trade or settlement (non-deliverable) futures, which are a type of contract that involve the conclusion of an agreement without physically transferring the object.

Bitcoin futures produced to-date are the settlement type of the trade agreement since there is no physical transfer of the asset. All financial transactions on futures contracts are a practical tool in trading since they can perform two actions:

  1. Hedging (insurance of price movement risks)
  2. Speculation (the possibility of quick earnings on the difference in the value of the subject of the transaction)

Players involved in speculation are very interested in bitcoin’s price volatility because it gives them the opportunity to open short and long positions several times a week and make good money. Experienced traders who use technical analysis to predict movements in the market quite often make profits on futures transactions with Bitcoin.

In the next article, I will speak more about terms of BTC futures and where one can trade them.

Featured image courtesy of Shutterstock. 

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.9 stars on average, based on 43 rated postsVladislav Semjonov has a legal and financial background. He has been involved in crypto space since early 2017 in both ICO advising positions in several ICO consultancy firms, and as an ICO analyst for VC. He began contributing for Hacked.com in April 2017.




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