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Saturday, August 22, 2020

How to Trade Psychological Support and Resistance - Ethereum

How to Trade Psychological Support and Resistance - Ethereum

ETH/USD COINBASE:ETHUSD

In this idea I will explain how you can leverage psychological support and resistance levels for trading ETH/USD. This will help you earn more money while trading, and gives you more understanding about the markets. I have been talking about this for quite a while now, and every time it shows that it works again and again.

TL;DR: (Too Long, Didn't Read)
Now that ETH is hugging this important $400 level for a while you can make two decisions. First, you can try to monetize the bearish scenario by putting a short position entering close to $400 expecting it to get rejected. Second, you can try to monetize the bullish scenario by waiting for a breakout and using the S/R flip knowledge to trade a long based on the new support of $400.

I will split this idea in multiple aspects. First of all, I will go into ETH/USD and explain the most important levels on the chart based on the principals of human psychology. Then, I will explain why I believe the cryptocurrency markets have a much stronger tendency to behave according to these principles than any other markets. Last, I will explain how you can benefit from these concepts.

-- What are these psychological levels you are talking about? --
Look at how BEAUTIFUL all the numbers are on my chart. They are all incredibly round numbers, which match perfectly to the levels of support and resistance . The levels that I identified are:


Computer scripts don't come up with these round numbers, humans do. You can see human trading behavior at work here, along with human psychology. This is exactly where humans would put their limit orders, or where they will put price alarms. Let's compare the different kind of support and resistance lines you can draw. First, there are the most common ones based on past price behavior. A local high will be extend on the chart to indicate that this has been a point where price has historically bounced. This has medium predictive power. Secondly, there are psychological levels without any price action. Simply looking at a chart and seeing ETH is about to hit $400 should make you conscious about having psychological resistance. You can add these lines to your chart. Thirdly, there is confluence between psychological and price based support or resistance. Those are the ones I charted here for you. These have incredible predictive power. Keep an eye on them. They are important.

A great way to confirm these level is by zooming out and going back in time. I tried to show it on the chart here, but it would simply get too cluttered if I show you multiple timeframes. If you take these levels, and you zoom out, you see that the same levels are important over and over again. These levels can perfectly predict highs and lows throughout months, even years. This is why you should always add these on your chart! It works 100x better for USD pairs than for BTC pairs. So don't forget to look at your USD pairs too when you are trading.

Also, you can see the price responds very heavily to breakouts. Whenever the price moves beyond a psychological level, you can see extremely strong and sudden price movements. I marked a few of these examples in green on the chart for you.

-- Why do cryptocurrency markets have a strong tendency to have these human levels --
It's simple: liquidity. The big banks with their big algorithms have the task to take one billion, and turn it into two billion. The entire marketcap of Bitcoin is only 125 billion, the trading volume for BTC USDT is only around $500M on a given day at the largest exchanges. It's simply not lucrative. The only thing you can do in the current crypto markets, is take your one thousand dollars, and try to turn it into two thousand. This scales a bit further on the larger market caps such as BTC and ETH, sure, but for a maxium you can make try to turn one million into two million. That's pretty much it.

The conclusion of all of this is that the big algorithmic traders don't even want to be here, they couldn't care less. This is a field for traders who play with crypto as their hobby, people with some spare time on their hands. Perhaps.... you! The reader. And me, yours truly. There are normal people trading on the cryptocurrency markets. This is what causes the price to have these decimal-perfect support and resistance zones. And this is why you'd want to put so much attention into these areas while trading cryptocurrency.

-- So, How Do I Beat Other Human Traders? --
Think carefully about where you put your limit orders. If the resistance is at 9200, don't put your limit order at 9201 right above a huge resistance. Be smart, and put it at 9199 or even a little bit lower. This reduces your profits only slightly, while greatly increasing the odds that your limit price will be hit. This also works for buy orders, never put those on round price levels. Instead, look for non-round numbers slightly disadvantageous to the profit, but very positive for your hitrate.

And then of course there is other expected behavior, based on regular support and resistance technical analysis knowledge. To trade based on support and resistance levels, we try to buy close to the support and sell close to the resistance, or for a short the other way around. Now that ETH is hugging this important $400 level for a while you can make two decisions. First, you can try to monetize the bearish scenario by putting a short position entering close to $400 expecting it to get rejected. Second, you can try to monetize the bullish scenario by waiting for a breakout and using the S/R flip knowledge to trade a long based on the new support of $400.


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- Trading Guru

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Disclaimer!
This post does not provide financial advice. It is for educational purposes only!



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