Support and Resistance Trading Strategy: Trading Bounces and Breakouts

Intro

In the context of the crypto market, supply and demand are crucial concepts that help traders anticipate forthcoming price action around relevant levels where the price has already reacted in the past. Supports and resistances are these price levels on a trading chart where there are expected to be a large number of buyers and sellers.

Because supply and demand increase at these points, there is a greater probability that the price will react when reaching them. In this article, we will discuss how to trade support and resistance in terms of bounces and breakouts

What is Support and Resistance?

Support is a price level at which a downtrend can be expected to stop due to a concentration of demand or buying interest. As the price of the crypto asset falls, the demand for the asset increases, forming the support line.

Resistance happens when the price tends to be stopped from rising beyond the level because the supply is strong enough to keep the price at or below that level. It is a line drawn above the main highs.

Traders can identify support and resistance levels using pivot point levels, moving averages, or, more commonly, simply marking levels in the price history of the chart where the price had a difficult period breaking through.

When crypto markets go up there tends to be significant demand, then at a resistance level supply and demand balance their power and when markets go down there tends to be considerable supply, at a support level supply and demand where they balance their power.

The mechanism behind support and resistance levels

Traders who are in a long position and expecting an increase in price can consider placing a new buy order if the price falls back to the same support level. Traders who are in a short position can buy to cover their position at the same support level.

Two events can happen around support and resistance:

1. If the majority of market participants buy at a certain level of demand, prices will bounce back from support due to the weakness of supply. Conversely, it can also happen the other way around. If most traders sell at a certain level of supply, the price will fall overcoming demand.
2. If the price breaks the support level, long traders can wait for prices to rise back to the previous support level, which will now act as resistance, to cover or close their position. At this time, short traders may consider adding a new position(s) at the new Resistance level.

The role of round numbers

Support and Resistance can often also be seen in a round number. Which can represent a barrier in the psychology of traders or an attractiveness in the price.

For example, let's say there is a 50,000 price level on Bitcoin. Typically, a round number like that will be used as a support or resistance level, probably because traders have set multiple take profit or stop loss orders around that price, which can affect the attempts to break out of the level.
Key aspects of trading support and resistance

• Support and resistance can identify trends, letting spot entry and exit points.
• Support and resistance can identify ranges.
• Support and resistance indicate supply and demand.
• Not all support and resistance levels are meaningful, it is crucial to identify key levels.
• When a support or resistance line is broken, it often reverses to become a resistance or support line for future price movements.

Trading Bounces and Breakouts

Bounces are a typical price action where the price is rejected from a key level. Breakouts would be the price going through and beyond that key level.

Let's discuss how to trade support and resistance based on these terms.

Trend Breakouts

During an uptrend, the price will tend to break through previous resistance levels to reach higher highs, while a bearish trend will break through the previous support levels in the market to reach lower lows.

When the support line below the recent major low breaks in an uptrend, it indicates that the uptrend is weakening and may reverse soon.

Similarly, when the recent resistance line is broken in a downtrend, it indicates that the trend is weakening and a trend reversal may occur.

Trend Bounce

In trending markets, the price tends to pullback various times offering traders the opportunity to enter a trade at better prices. These pullbacks consequently will encounter the support or resistance trendline, depending on whether it is an uptrend or downtrend.

When the pullback reaches the trendline, it is expected to act as support in the uptrend, bouncing the price off towards the continuation move.

Similarly, when the pullback reaches the trendline in the downtrend, it is expected to act as resistance.

Resistance Level Turns Into Support

The support area reacts twice, bouncing the price up.

Range Breakouts

During a range, the price will tend to break through the sideways resistance or support levels to get out of the consolidation phase.

Breaking through the resistance might indicate some continuation, but breaking through the support can be a signal of reversal.

Range phases in the market generally appear after a significant move or a trending season.

Chart patterns like head and shoulders, triangles, and flags tend to form internal ranges with the expectation from traders that the pattern would be broken.

Range Bounce

In a range-bound market, the price will bounce repeatedly from support and resistance levels. These are phases where the price consolidates notably.

When the price reaches the resistance, it is expected to bounce down towards the support of the range.

Similarly, when the price reaches the support, it is expected to bounce up towards the resistance of the range.

Range where the price is bouncing inside.

Conclusion and Call to Action

Support and resistance set the basis for trading the zones of most relevant price action. Trading bounces is an effective way of approaching a pullback in a trend, or after identifying a resistance in a range market, expecting a breakout of it. Bounces mean a support or resistance is active and breakouts indicate the zone is no longer strong.

If you want to trade support and resistance in the crypto market with all the necessary tools, in Altrady you can sign up for a free trial account with paper trading to test your strategy based on key levels.