New traders are often flabbergasted when reading technical analysis ideas. They read dozens of jargon words or concepts they haven’t got a clue about. The complexity can deter them from ever trading since they’re only just starting to learn about crypto trading basics.
TA experts talk about support, channels, trendlines, breakouts, and other concepts. However, they don’t realize that their readers can’t understand them at all – which is a shame, considering how many great resources are out there.
Trading crypto doesn’t have to be difficult. You can trade crypto just fine by understanding the fundamentals. To assist you in your trading journey, I have prepared the ultimate guide to crypto trading basics that explains everything you’ll need to know.
Trading involves identifying and trading around support and resistance levels. These levels are prices at which assets sharply react in a bullish or bearish context.
A support level holds the price in place and prevents it from falling further. A resistance level prevents an asset from growing higher and acts as a barrier. When an asset’s price reacts sharply to these levels, it has been rejected.
We identify these levels by observing price action. Whenever price reacts consistently to a certain level, we can draw trendlines to identify a pattern.
Above we have a 15-minute time-frame BTC/USD chart with an obvious range formed between $42,835 and $43,215. Except for slight price deviations, Bitcoin traded consistently within the range for a span of two-days. And before Bitcoin ultimately dumped, it hit the support level to briefly retest it.
Retests are a way for the market to establish the strength of a level. It is one-last attempt before heading into the opposite direction. The taps themselves are a way of testing whether a support or resistance can hold.
On a basic level, resistance and support are levels deemed to have overextended. A common example is an asset that, within minutes, creates a huge all-time high only to fall back from where it came. The same happens when an asset is in freefall, like the March crash of 2020. Support and resistance are the most important crypto trading basics you’ll learn about.
Price channels are formed when price moves between two parallel lines. Price channels can be ascending, descending, or horizontal. You can trade channels by treating them the same way as resistance and support levels.
The steepness of a channel decides its momentum. The higher the momentum, the higher the chance the price continues moving in the channel's direction. An ascending channel hits higher highs and higher lows while a descending channel trends toward lower highs and lower lows.
Horizontal channels range sideways until a breakout point. Day traders focus on LTFs when trading a horizontal channel to capitalize on small but frequent profits. However, it’s also possible to trade the breakout of a horizontal channel to profit from a higher price move. You can do so by placing an order above or below the channel.
Trading price channels is fun because it allows you to place orders in an area that has a high chance to hit and fling in the opposite direction. For example, drawing the resistance (upper range) of an ascending channel shows you all future rejection points which you can short.
A trend is a direction that the market takes on a short or long-term basis. Like channels, trends move upwards, downwards, or horizontally. We can identify trends by drawing trendlines or patterns and connecting candlesticks that trend in a certain direction.
Trading trends works because you move along with the market. However, some choose to be contrarians and trade in the opposite direction hoping the market is wrong.
While downtrends are controlled by resistance, uptrends are controlled by support. The image below shows an example of an uptrend where Bitcoin made higher highs and lower lows for a period of one month. However, the trend failed as soon as the price broke below the diagonal support level.
This example shows the downtrend formed after Bitcoin’s collapse in 2018. Although a support level at $6,000 held the line for a long period, the price ultimately trended downwards. Once the horizontal support couldn’t hold any longer and buyers failed to breach the resistance, Bitcoin fell below and collapsed one more time.
Some trends are abnormal. For example, crypto bull runs feature parabolic rises where assets make extraordinary gains. During 2017’s bull run, Bitcoin appreciated roughly 568% in the span of four-months, with only a few -30% drawbacks in between.
Bears also have abnormal scenarios. Black swan events such as the 2020 March crash featured a price fall that brought Bitcoin to its knees. The asset fell 56% in the span of a week as news of the pandemic influencing world production crashed the stock market.
Crypto trading basics also include knowing bearish concepts, such as pullbacks. A pullback is when an asset’s price temporarily falls down after a move up. We refer to them as pullbacks because we believe that the asset will continue trending up after buyers consolidate. However, that doesn’t mean that every pullback will go back up.
Pullbacks happen because buyers eventually take profits in uptrending conditions. When they do, bulls have less strength and the price must retrace before attempting to make a higher high. But if the price fails to make a breakthrough, it will dump below and enter a reversal, starting a downtrend.
Traders view pullbacks favorably because they lead prices to fall back to a major support level. An asset may drop to a moving average, diagonal and horizontal support, or to the lower band of a chart pattern, and when it does, traders have a great spot to long again or to add capital to their position.
Usually you want to spot the price level a pullback will reach ahead of time as they don’t stay in place too long. You want to target places that will act as support, such as:
But how do you know when a pullback isn’t a reversal? Both events include an asset falling down from its highs. However, a pullback happens instantaneously and reverts back while a reversal happens over a longer time-scale. A reversal will also break down below a strong support level, so traders should place their stops below it.
Another way to distinguish between reversals and pullbacks is by checking market sentiment. Has the price dropped randomly or did an external event cause the asset to fall down? And if the price dropped without a reason, can you find data that indicates that buyers have overextended or are over exhausted?
But how do you know when a pullback isn’t a reversal? Both events include an asset falling down from its highs. However, a pullback happens instantaneously and reverts back while a reversal happens over a longer scale of time. A reversal will also break down below a strong support level, so traders should place their stops below it.
Another way to distinguish between reversals and pullbacks is by checking market sentiment. Has the price dropped randomly or did an external event cause the asset to fall down? And if the price dropped without a reason, can you find data that indicates that buyers have overextended or are over-exhausted?
Breakouts commonly form in combination with chart patterns. The image above shows a horizontal triangle that's made out of a horizontal support level and descending trendline as resistance. As the range closes in, the chance for a breakout to occur to either side heightens. At that point, the market decides whether it will attempt to break upward or whether the lack of buying pressure will cause the asset to fall down.
But breakouts are not as decisive as you might think. Sometimes an asset can attempt to create a breakout on the upside only to fall back into its range and crash below. We refer to this failed attempt as a fakeout.
Investors who trade breakouts are usually punished for it. Their tactic is to place a long or short position outside the range at the point of the breakout. However, the fakeout will activate their position but liquidate it soon after. That’s why traders should, using the triangle example, long the range’s bottom or short its top.
Whenever assets move up or down there’s always a chance for them to reverse their course. Reversals happen when there is not enough conviction in a trend or when outside news changes the market’s mind. They typically occur during the intraday trading session, but they also take place at HTFs.
A reversal can be as insignificant as a temporary pullback on the 5m time frame or as important as a major drawback on the weekly level. While identifying the first is only important for the day trader, the second bears importance for all traders.
Spotting reversals is easy. As soon as the price falls below a major support level, expect the asset to revert its course. But beware. Just how a breakout can turn out to be a fakeout, so can a reversal be a fake reversal.
There is a lot more to crypto trading basics than support, reistances, channels, and trends. Although this guide presents you with the most important fundamentals, you’ll have to spend a bit more time before you master everything. Most day traders remain unprofitable, so you have a long road ahead before you can start trading safely.
Fortunately for you, you don’t have to waste months exploring every nook and cranny of the crypto world. I highly recommend reading A Beginner’s Handbook to Trading Crypto – a special ebook dedicated to newcomers. I’ve collected every piece of information and personal knowledge to aid you in trading crypto markets. You’ll also have a small taste of the wisdom and experience I’ve collected over the past few years – and I’m here since 2018, mind you.
If you want to learn more about crypto trading basics but want something shorter, I recommend reading the following articles:
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