We have said that the price moves like a wave within a long-term trend that can be bullish or bearish; It is trading support and resistance. quite simply, in a bull market, the price tends always to touch new peaks, while in a bear market, it tends always to touch new lows.
When in the middle of a well-defined trend, the price fails to touch a new peak (minimum or maximum.) This is the first sign of a trend weakening and indicates that we may be close to reversing the main trend.
If we then graphically combine the maximum peaks reached by the price with a straight line and do the same for the minimum peaks, we graphically obtain important levels at the level of technical analysis; these are called support (the line that joins the minimum peaks) and resistance (the line that joins the maximum peaks.)
Therefore, when the price is near support, this represents a difficult level to break downwards, and it is easy to say that (in the short-term trend) the price will rebound. In the same way, when the price is near the resistance, it is easy for the price to
begin to slide down, seeking the first useful support again. However, we must always consider that the more times these levels are tested. The less likely they can withstand the next wave. When the price starts beating against resistance, sooner or later. It is likely to be able to break it and therefore start to rise.
Two relevant moments for a trader’s activity
There are two relevant moments for a trader’s activity in this dynamic. When the price is near those price levels that we have called supports and resistances. When the price breaks these levels. Given that today there are financial instruments that allow you to make a profit even when the price is falling (short sale). It would be preferable for a novice trader to concentrate on making all upward operations. And then integrate more advanced tools into their operations.
Our neophyte crypto traders, want to profit from the upward variations in the price. Have two ideal moments to open a position. Precisely when the price is near support and when the price breaks a resistance. Opening a position by counting on the rebound near the support is a strategy that often allows you to make a profit. Which presents greater risks since it is not said that the support will hold. Instead, opening the position when the resistance is broken upwards is a more moderate trading strategy. That allows us to take fewer risks but offers fewer profit opportunities.
Despite how sophisticated our market analysis skills are, no one can predict where the price is going. This is always true, even more so in a market like cryptocurrencies, which is subject to continuous manipulation. As the cryptocurrency market is often not very liquid, some operators with large financial capacities are in a position to be able to provoke speculative maneuvers that are referred to as “pump and dump.”
They accumulate large quantities of coins at a certain price for weeks and then suddenly inject enormous volumes of liquidity, causing a rise in prices that will subsequently allow reselling to other operators at a profit.
After completing the speculative maneuver and painfully trimming
After completing the speculative maneuver and painfully trimming the package to all the operators who had rushed to chase that sudden rise. The price of the currency (lacking the liquidity that had allowed the rise) falls back down.
Therefore, among the rules that should be given when trading cryptocurrencies, we have not to operate on illiquid pairs (which generate a trading volume lower than a minimum. Which is commonly established around 20BTC per day) and that investing in projects that you know well. In which you have great confidence (so you have to study the various platforms. Carry out your fundamental analysis and carefully choose which ones you want to operate on.). Before moving on, let’s use a simple image to fix what we just said; in the following chart. We see that the price moves within a “channel” limited by two lines that respectively join the minimum peaks (the red support line, and the black resistance line.)
When at a certain point, the price shows the first sign of weakness and does not show itself capable of testing the resistance again (black line). Here, it tries to breathe for some time near the support; at this point, we witness the last attempt at a bullish sortie, then the price suddenly drops, breaks the level (already tested several times previously,) crosses the red line (the support,) and enters a markedly bearish cycle in which at each new low one that is always lower than the previous one follows.
What are Support and Resistance?
