Support and Resistance Breakouts - Crypto Academy / S6W3 - Homework post for pelon53.
Introduction
Hello crypto Lovers!
Week 3 of season 6 greetings to you all. I hope you all enjoyed the trading competition in the last two weeks at the crypto academy community. It is another week to learn beautiful things from Crypto Professors. I am Kehinde Micheal, and my username is @msquaretwins here on this platform. My first homework post this week will be for Professor @pelon53 who have presented a topic on "Break of Support and Resistance ". Please follow me closely as I answer series of question posted in the homework section. Happy reading
1. Explain in detail the advantages of locating support and resistance on a chart before trading.
In financial market, support and resistance indicate a great area of price reversal. It is important to locate support and resistance in market because they help traders to take good market decision. Support and resistance are key level in market where the price of an asset has a great tendency of stopping and reverse back from market.
Apart from the fact that support and resistance are great reversal area, traders use these area to determine their entry and exit order. Correct identification of support and resistance area or zone helps traders to either make entry order or exit the current order. It must also be noted that these areas also help in proper placing of exit order, both stop loss and take profit.
In a support level, an asset that has been bearish for sometimes often stop at this area and reverses back to the upside. This means that sellers who have been riding the bearish trend often close their position at this level while buyer take charge of the market by dragging the price to the upside down. The otherwise is the case for a resistance level. Resistance level is an area where price which has been on a bullish trend stops and reverses back to the downside direction.
Another important use of support and resistance level is for management of order. Traders use both support and resistance to manage their trade order. Some traders use these areas to take partial of their profit in market while they allow the rest to run. More so, these areas also tell us more about the supply and demand in market, and this in turn help traders to take good market decision at every point in time.
2.- Explain in your own words the breakout of support and resistance, show screenshots for the breakout of a resistance, use another indicator as a filter.
The breakout of resistance occurs when price that has been moving on a price range (upper and lower limit range) for some times break the resistance zone upward. The resistance zone in this case is the upper limit which price break and goes above it and then traded in an upward direction.
When a resistance is broken, two cases may happen in market. Price may retest the broken resistance before it continues its movement in an upward direction as seen in the picture uploaded below. As we can see in the picture below, price has been ranging and bounces back every time it hit the support and resistance zone. Then at a point, price breaks the resistance zone upward and the comes back to that zone before it continues an uptrend move. This is known as pullback in market.
Another case that may occur when a resistance is broken is what is called aggressive break. Aggressive break occurs when price break a resistance zone and never retest the broken. This means that buyers break the zone violently upward and price never allow to pullback. The example of this is uploaded in a screenshot below. As we can see, the breakout of resistance in this case never retest the broken resistance.
In filtering the breakout of resistance zone, I have added a Bollinger band indicator to a chart as seen in the screenshot below. As we can see, we have a clear break put of resistance zone as indicated in the screenshot. Now notice that after a breakout of the resistance zone price, at the same time, price break the middle Bollinger band upward which also indicate that buyers have taken charge of the market. Then shortly, price then stick to the upper Bollinger band. When price sticks to the upper band, it means a strong bullish trend. This is a way to help trader identify the direction of an asset together with the breakout that occur.
3.- Show and explain support breakout, use additional indicator as filter, show screenshots.
Support breakout is nothing but a breakout of a support zone in market. As we know, a support zone is an area where price which has been on a bearish trend stops and reverses back to an upward direction. Now, when price which is expected to get to this zone breaks the area downward, then it is said to be breakout of support.
In the screenshot uploaded below, we have two zones, the upper zone and the lower zone. The lower zone is called the support zone. And as we can see that price has been bounces up and down at resistance and support zone. But when it get to a point, support zone could not longer push the price upward and as such the zone got broken. This is called the breakout of support.
Like we have two cases for resistance breakout, the cases is also valid for support breakout. The first case is a breakout that occur with a pullback. That is, after a breakout, price retest a broken support before it continues to move downward. The picture uploaded below is an example of this case.
Another case is the breakout of the support without a pullback. This means, price does not retest the broken support after a break. It is often called a violent breakout. This means sellers violently break the support zone. The picture uploaded below shows an example of a breakout without pullback.
In filtering the support breakout, I have added a Bollinger band indicator to verify the breakout spotted as seen in the screenshot uploaded below. As seen in the screenshot below, there was a break out of support zone. Then after a breakout of the support zone, at the same time, price break the middle Bollinger band downward which also indicate that sellers have taken charge of the market. Then after this we see that price stick to the lower Bollinger band. When price sticks to the lower band, it means a strong bearish trend. And with this trader can be sure of the direction of an asset.
4.- Explain what a false breakout is and how to avoid trading at that time. Show screenshots.
False breakout occurs when a price breakout of the support or resistance zone and the reverse in an opposite direction. In false break out, price instead of continue in the direction of the break out takes a direction opposite to the direction of the breakout. False breakout is always the ideas of strong hands in market and it is a way of luring retail traders to take non profitable order.
The picture uploaded below shows an example of a false breakout. As we can see, price breaks the support zone but later takes a direction to the upside. At this point, any trader who takes a trade immediately after this false break out will lose the trade. Therefore, one of the reasons to avoid trading false breakout is to wait for a clear breakout at either of the zone. Traders can wait for price to retest a broken support or resistance and the make a new high or low before considering opening of order in market.
Apart from the above, another way to avoid trading a false breakout is to filter the breakout with technical indicators. Technical indicators helps to filter noises in market, and when used in confluence to the support and resistance break strategy, it can be so effective.
5.- On a demo account, execute a trade when there is a resistance breakout, do your analysis. Screenshots are required.
The screenshot uploaded below is a chart of SOL/USDT on a 30 minutes timeframe. We can see that price was bouncing back anytime it hit the support and resistance identified in the picture. Then at a point, it breaks the resistance zone upward as indicated in the screenshot.
Then after the break of the resistance zone, price comes back to retest the broken resistance.
Then at the retest of the broken resistance, I took a buy order with;
-Entry price = $82.95
**- Stop loss = $81.29
- Take profit = $87.22
Then the screenshot uploaded below shows the demo orser of SOL/USDT a MT4 trading platform. The entry point, stop loss and take profit are identified.
Then the picture below shows the running order of SOL/USDT which was taken immediately the order was placed.
6.- In a demo account, execute a trade when there is a support break, do your analysis. Screenshots are required.
The screenshot uploaded below is a chart of CHZ/USDT on 3 minutes time frame. As we can see, we can see a price range as bounded by lower and upper limit lines on the screenshot. The lower line is the support zone and the upper one is the resistance zone. As we can see, price break the support zone downward and then retest the broken support.
At the retest of the broken support as seen in the screenshot uploaded below, I took a sell order with;
- Entry = $0.19835
- Stop loss = $0.2395
- Take profit = $0.19463
The sell order of this trade was taken on Binance futures as seen in the screenshot below. I set the stop loss and the take profit and then clicked the sell button as indicated in the screenshot.
Then I confirmed the sell order by clicking the "confirm sell" button as uploaded below.
The screenshot uploaded below shows the running order of CHZ/USDT on Binance App.
Conclusion
The importance of support and resistance in market can never be overemphasized as it gives traders opportunity to take a good market decision and to manage their trade orders. It is also a good indication of entry and exit order in market. Therefore, the good understanding of support and resistance is highly needed if a trader wants to be profitable in market.
In this post, I have discussed extensively about support and resistance in market and the reasons why they are importance. I have also discussed the breakout of both resistance and support with necessary screenshot showing them on chart. More so, I also discussed the false breakout of support and resistance and the people who are behind them. Finally, I took a buy and a sell order after my analysis of breakouts of resistance and support zone.
Special thanks to Professor @pelon53 for this wonderful lecture.
Thank you for reading.
Cc: @pelon53