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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.

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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.

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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 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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Education

Trading 101: What is the Best Trading Software?

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Trading software

As we all know, any kind of professional activity requires its own set of tools and equipment. Trading is no exception to this. It is also true that the more demanding your use is, the more expensive the required equipment tends to get. Still, when compared to other jobs you could take up, the equipment required to trade, whether it is in crypto, stocks, or forex, is quite cheap.

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You have wide options available when it comes to choosing a platform to trade on. Cryptocurrency traders usually use an exchange with its own decent web-based trading interface, thus reducing the need for other platforms that forex and stock traders have traditionally used.

Many cryptocurrency traders instead opt to do their charting on a separate platform, and then place their orders directly on the exchange. In fact, separating trading and charting is a good practice that I usually recommend because it keeps you from making impulse trades when you are doing your analysis. If you instead do your analysis on a separate platform, and then need to log in to your broker to place the trade, chances are you will have time to reflect over what you are doing and thus reduce the likelihood of making mistakes.

Trading software packages also vary widely in price, from free basic packages to extremely expensive options designed for institutions. In this article, I will cover two of the most popular platforms for retail traders that are available for a relatively low cost.

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TradingView

Perhaps the most popular charting software for technical analysis right now is TradingView. This platform has earned the top spot over the past few years for very good reason, with the main one being its social experience.

TradingView lets users publish their own trade ideas for the rest of the community to see and rate. Ideas are usually based on technical analysis, and are drawn directly on the charts using the built-in tools for technical analysis.

While TradingView used to be a community mainly consisting of forex traders, a huge number of cryptocurrency traders have also come to the platform over the past year. The charting tool now supports a large selection of cryptocurrency trading pairs, and their “Cryptocurrencies” chat has become one of the most popular chats on the platform.

Lots of technical analysis enthusiasts will claim that TradingView is simply the best charting platform available today. It is simple enough for beginners to understand, while at the same offers all of the features an advanced trader would ever ask for.

You can start using TradingView for free today, and choose to upgrade to one of their paid plans later once you become comfortable with the platform. Although their prices have increased over the past few years, TradingView is still reasonably priced considering how powerful the platform is.

TradingView has the following subscription plans (month-to-month subscriptions):

  • FREE
  • PRO: US$14.95/month
  • PRO+: US$29.95/month
  • PREMIUM: US$59.95/month

All plans offer better prices if you opt for a 2-year subscription period. Personally, I feel that their PRO+ plan offers the most bang for the buck.

MetaTrader

While TradingView is a web-based platform that runs directly in your browser, MetaTrader is a more traditional kind of trading software that you need to download on your computer. Originally built by Russian company MetaQuotes Software, MetaTrader is by far the most popular trading software for retail forex and CFD traders in the world.

We have previously talked about how you can profit from having robots trade for you, and this is probably what the MetaTrader platform has become best known for. You have the option of tracking the trades of a free robot, or paying for access to a (presumably) better one. You can also track the trades made by other human traders in the same way, also known as copy-trading.

MetaTrader users can also put their coding skills to work and develop their own trading robots or custom technical indicators. The end result of your work can either be used by yourself or sold to other users on the built-in marketplace.

As a new trader, it is really important that you don’t blindly buy into the promises of trading robots you come across, and that you are aware of their limitations. As Jonas explained in his recent article, oftentimes these robots will perform fantastic for a short amount of time before they eventually fail miserably, causing you to lose all the money you initially gained. Trading robots are sometimes optimized to perform perfectly in past market conditions, but that does not necessarily mean that they will perform equally well in the future. This is one of the big pitfalls of algorithmic trading, often referred to by traders as “curve-fitting” or “over-optimization.”

Lastly, there is no doubt that MetaTrader has a more advanced feel to it than TradingView, and it is also more complicated to learn how to use it. That alone, however, does not mean that it is a better platform to use.

MetaTrader or TradingView – which one should you go for?

Perhaps the best way to approach this is to think of MetaTrader and TradingView as complements of each other. You could for example use TradingView solely as a technical analysis tool and a social network for staying in touch with other traders, while placing your trades in MetaTrader (if your broker supports that platform).

Many traders who used to be hardcore supporters of MetaTrader have switched to TradingView, at least for their charting work. The most obvious reason for doing that is probably that TradingView runs in the cloud, and therefore automatically backs up everything you do on the platform. If your computer breaks down while using TradingView, you can simply get a new one and continue where you left off. With MetaTrader however, everything is saved locally on your hard drive, meaning everything you have done will be lost when your computer crashes.

For those active in the forex market, most brokers will offer their own web-based trading platform in addition to the MetaTrader platform. I would recommend starting with the web-based solution to learn the game at first. MetaTrader may feel overwhelming to start with, and there is no need to make things more difficult than they already are.

Once you have gained more confidence in the markets, you can try out MetaTrader if you feel the need for more advanced functionality or want to test out trading robots. If you instead prefer to do your own technical analysis, TradingView has you covered with pretty much everything you will ever need. By doing it this way and taking things one step at a time, your learning curve will become more manageable and your odds of success greatly improved.

Featured image from Pixabay.

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

Stop Strategy Hunting Now!

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One major problem that many new traders who struggle to achieve profitability have, is that they are constantly looking for the holy grail of trading strategies, thinking that it’s going to change their life without having to do much work at all.

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Let’s clarify this right now: The holy grail in trading doesn’t exist. The sooner you stop looking for it, the better off you will be.

You may be wondering then how you can achieve profitability, when you current trading yields negative results. The key to understand this is to start thinking in terms of your process and optimization of it instead of the strategy itself.

Rather than looking for a winning strategy, you need to find out how you can turn your current strategy into a winning one. This is often one of the main things that separate amateurs from professional traders.

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Your trading journal is key

Do you record all your trades in a proper journal where you meticulously record down everything of relevance to the trade? This is the first order of business. Without a trading journal, you are simply helpless when the time comes to analyze your trades.

Some of the main requirements for a good trading journal include:

  • Entry price, stop loss, and take profit levels
  • Strategy used and triggers for trade entry
  • Confluence factors
  • Describe your thoughts and emotional state when you entered the trade
  • Anything you don’t like about the trade?
  • Position sizing and risk management
  • A snapshot of the chart

If you keep a trading journal with all this information, you can easily go back and find out what has worked for you and what needs to be changed. Review and optimize your trading before you jump on to a new strategy you found online. Remember that a profitable trading strategy is not “found”, but it is built step by step.

With proper journaling, I will even go as far as to say that you can turn any trading strategy into a winning one.

Keep in mind that in order to get a statistically valid answer as to whether or not your current trading system works, it is usually recommended to have at least 50-100 live trades recorded down in your journal.

With his in mind, it becomes obvious that there is no way to build or improve a trading strategy if you constantly change it. The reason is simply that you don’t have enough trades to determine if the strategy is profitable or not over the long-term, and you also don’t have enough data to know what needs to be changed to make it profitable.

Don’t switch strategy when you lose money

It’s crucial for your long-term trading success that you are aware of the fact that markets always change. There will be periods when your strategy performs exceptionally well, followed by periods of poor results. This is inevitable, and it happens for everyone.

The important thing then is what you do during the periods of less-than-ideal results. If you have a systematic or “non-discretionary” trading strategy, you have probably back-tested it and seen the yield curve over time. You would then know that weeks/months/years (depending on your trading timeframe) of negative or break-even results can be expected to occur with regular intervals.

You absolutely need to stick with your system during these periods of disappointing returns. Far too many traders have switched out their strategy just to realize that it would have turned profitable again shortly after, as in the yield curve example below.

Yield curve

Still, the reality is that it is extremely hard for humans to stick with a trading strategy through extended drawdowns, especially if it lasts for months at a time. There is a concept in trading psychology called emotional capital, and extended drawdowns will simply drain you of emotional capital.

Emotional capital is as important as trading capital in your account when it comes to trading. If you run out of either one of them, you will fail as a trader. You therefore need to have confidence in your trading strategy and entire trading process. Know what to expect, and know yourself well enough to tell how much of a drawdown, and for how long a period, you can handle emotionally.

Finally, it is worth remembering that as with everything else in life, persistence is key and success doesn’t come easy.

Featured image from Pixabay.

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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Done with Trading Cryptocurrency and Need an Exit? Here are Some Ways

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Exit strategies of cryptocurrency

Money management is the key to successful trades. Cryptocurrency is a highly volatile market, as asset prices are extremely unstable. Traders and investors who are trading cryptocurrency often find it difficult to determine the right time for an exit. In most cases, traders enter a trade without any valid exit plan whereby they withdraw funds at inappropriate times and run heavy losses. Traders, especially those who are new to the cryptocurrency market, need to know about the exit options available to them, so that they are better equipped to develop an effective exit strategy for maximum profitability.  A decent exit strategy not only allows traders to overcome price fluctuations but also enables them to shield against the unnecessary loss of funds.

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Types of Exit Options

There are mostly two ways of getting out of a trade, by choosing the Take-Profit (T/P) order or the Stop-Loss (S/L) order.

Take-Profit (T/P) Order

The Take-Profit (T/P) order is a lucrative strategy that enables traders to close a trade after it reaches a decent profit. Take-Profit orders, which are also known as limit orders, are often paired with stop-loss orders to define risks and rewards. Although each trader is unique when it comes to the risk profile, there are certain criteria that determine whether it is safe to use a Take-Profit order. To begin with, this order is highly effective for long-term traders who aim to take an advantage of long-term trends. Take-Profit is particularly useful when the market is ranging, as the resistance levels tend to restrict price advances and the support levels hold up price drops.

Cryptocurrency Exit

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Figure 1: Exit Trades with Limit Orders

Stop-Loss (S/P) Orders

Stop-Loss orders are usually placed with brokers when selling equities at a given point/price. When this point is successfully reached, the Stop-Loss order is converted into the market order. This strategy is used to define risks and rewards and is a good way of minimizing losses when a market moves suddenly. Before you opt for this order, it is essential to understand that Stop-Losses are always placed above the asking rate or just below the bid price. Furthermore, there are three important variants of Stop-Loss orders:

  • Good ‘till Cancelled (GTC): This order is valid only until an execution takes place or if the user manually stops the order.
  • Day Order: Generally, the Stop-Loss expires after one trading day.
  • Trailing Stop: This order adheres to a certain distance from the market price and moves downward.

Tips to Exit a Cryptocurrency Trade

Entering a trade without a proper exit plan can land you in a serious mess. Trading strategies alone do not guarantee a good profit, as traders need to be careful about potential losses. To ensure a decent profit and minimize losses, traders can consider the following recommendations.

Develop insight into the blockchain and cryptocurrencies

Before investing in cryptocurrencies, traders need to understand how the blockchain system operates. Goldman Sachs opined that blockchain technology “has the potential to redefine transactions.” But only a few people have grasped how the system really works. To put it simply, a blockchain is the list of records, also known as blocks, which are regulated by cryptography. Aside from nitcoin, there are numerous other cryptocurrencies available in the market, such as Litecoin, Ripple, Ethereum, Dash, Bitcoin Cash, IOTA, to name a few. So, before proceeding with your trades, it is important to explore all the options.

Understand the Underlying Risks

Knowing when to enter a market and when to exit can be a challenging task, especially when dealing with cryptocurrency. Even many expert traders make mistakes and lose their funds. The cryptocurrency market is relatively new and is frequently influenced by public sentiment. The price of the currencies fluctuates based on the financial decisions of corporate companies. So, it is crucial to consider the underlying risks before finalizing any decision.

Follow Cryptocurrency News

As a cryptocurrency trader, it is important to stay updated with the latest developments in the market. For cryptocurrency related news and discussions, traders have an array of sources available to them.

Use Charts to Track Price Trends

Cryptocurrency trading involves continuous price fluctuations. To make the right decision at the right time, traders need to be equipped with relevant market analysis tools. To strategize the exit point, a trader needs to depend on the price actions. Nowadays, there are many charts and indicators available that help traders take valuable financial decisions. So, it is highly recommended that you use charts and other market research tools before deciding your moves.

Place a Limit Order

Above everything else, what matters most is placing settling for the right limit order. As mentioned above, limit orders are mainly of two types, the Take-Profit (T/P) order, and the Stop-Loss (S/L) order. Limit orders offer investors and traders with the mode of entering a position. The buy limit order can be placed lower than a stock. So, if the price dips to set value, the order will be executed automatically.  In case of a GTC, the order will be open unless it is canceled by the trader.

Cryptocurrency exit

Figure 2: Set Limit Orders

After you have set your limit order, it’s time to wait for the outcome. Allow the price time to fluctuate and wait if the limit order attracts a buyer/seller. Many mature traders set multiple orders at the same time to make the most of the selloff. Limit orders, if used judiciously can work wonders, enabling traders to earn substantial profits on their investments. Apart from the Take-Profit order and the Stop-Loss order, there are multiple advanced options available, such as IOC, FOC, and Stop Orders, which professional traders use to make a breakthrough in the market. Find out about all the options and make strategic use of them to make the most of your opportunities.

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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