HitBTC Trading Strategies
In a previous post, we introduced the basics of trend analysis. Let us pick up where we left and provide more insight into trading techniques to help you become an experienced crypto coin trader.
Trading Strategies: go long, go short and stay aside
A trader can make 3 types of decisions in the market: go long, that is, to buy, go short, that is to sell, or stay aside, which is actually doing nothing. For any type of trend, a trader should follow a specific strategy. When the market goes up, the buying strategy is preferable. And logically, the right thing to do when the market goes downwards is to sell. In a sideways moving market, it is advisable to stay aside.
Example of a downtrend which turns into an uptrend.
Look for support and resistance levels
In trend analysis troughs and peaks are commonly named support and resistance respectively.
In a chart, support indicates an area where buying interest is rather strong and surpasses the pressure to sell. In an uptrend (see example below), point 2 and 4 are regarded support levels.
On the contrary, a resistance level depicts an area on the chart where selling interest conquers buying pressure. Points 1 and 3 (see example below) indicate resistance levels.
In a downtrend, the image is exactly the opposite. It is composed of descending peaks and troughs. Here (see example below) points 1 and 3 represent support levels, and consequently, points 2 and 4 indicate resistance levels.
For an uptrend to continue, each successive support level should be higher than the previous one, and each next resistance level should be higher than the one before.
If this is not the case, for example, if the support level comes below the previous trough, this may signify that the uptrend either is coming to an end or is turning sideways. Probably a trend reversal from up to down will emerge.
The opposite happens in a downtrend. Support levels failing to move lower than the previous resistance may signal a changing trend.
The importance of trend reversal signals
A very interesting aspect with a high significance for trading the market is trend reversal, also referred to as a rally or correction. Support and resistance levels reverse.
An uptrend, which consists of higher highs and higher lows reverses into a downtrend by changing to lower highs and lower lows.
A downtrend, defined by lower highs and lower lows, reverses into an uptrend by changing into higher highs and higher lows. In other words, a resistance level becomes a support level, and vice versa.
A reversal can either be a positive or negative change to the ruling trend. In trend analysis these patterns are strong indicators of the necessity to change to another trading strategy.
The significance of trendlines
Trendlines are used to show the trend and also to identify trend reversals. 2 types of trendlines can be differentiated. An up trendline is a straight line, which is drawn upwards to the right along consecutive lows. A down trendline is drawn along successive highs.
The trend must be clear and evident. In drawing an up trendline, at least 2 reaction lows need to be present, where the second low is higher than the first. This is only a tentative trendline. In order to become a valid trendline, a third point will be the confirmation.
As long as the trendline stays stable, it can be used to determine buying and selling areas. But once violated, it serves as a clear warning of a change in trend. The significance of the trendline gets determined by the duration and the number of times it has been tested. When a trendline has been tested for 10 times, it is more significant than one which has been touched only 3 times. Likewise, a trendline that has been in effect for 6 months is of more importance than one which is only present for 7 days.
Our next article will explain more on the use of charts when trading the cryptocurrency market. Later on, some chart analysis will be illustrated by making use of the HitBTC trading platform.
Source: Technical Analysis Explained (by IFC Markets)