Trading based off past highs and past lows has got to be one of the most outdated pieces of advice when it comes to trading Bitcoin successfully. The concept is rather easy to grasp: If we are moving up we try to sell around and old major high, when we go down we try to establish a long position around a past major low.
The problem with this approach is that - as eluded to in the previous post - the pros know this common wisdom all too well and the markets have long transformed this former edge into a trap.
Now before I get misunderstood let me define my terms here.
Is it always bad to sell at a previous high or buy at a previous low? Not entirely, it really depends on your timeframe, how often you place trades, how long you intend to hold them and what old supports and resistances we are referring to.
But in general, entering an old peak or bottom and holding that trade for longer than a few minutes really isn't the best idea unless you have huge stops or no stops at all, hoping for the best and taking the heat in the meantime until the trade hopefully moves in your favor. I say "huge stops" meaning at least a few percent, which is really rather huge if you are trading with leverage.
Old highs are glaring (especially on higher timeframes). They are so apparent that what used to be a good idea to enter short has turned into a high probability of actually being run these days, precisely because so many people hold on to that outdated wisdom of reselling or rebuying those points that stick out. The pros are conscious of this bias and I have seen it exploited many, many times.
I have found that either old tops are never hit at all, or they are just barely run before the market falls back. Not hitting old tops on a run up will leave many people who originally planned on selling there empty handed, and just running old tops will readily look like a "breakout" to many newcomers going long beyond that old high which is often a trap.
It's easy to see that the upside momentum after running an old high could be purely due to buy stops of breakout traders who anticipate that this (now former) trading range had broken to the upside when in all likelihood people are just being toyed with by those who have seen through the trading dogmas that persist in the herd.
So what does a market do after an old high? It tends to sell tempoarily, sending all those breakout traders into immediate loss until they either jump out at a loss or hodl through and hope there will be a higher high soon. Again, a really bad spot to be in if you are leverage trading. We never want to just be hoping for the best.
Does the old high become completely worthless and meaningless though? Not at all!
It is often the actual second or third high after the current peak , lining up with a former legacy-high, "double-topping" with it so to speak. But double-topping instantly and on the first attempt up - that has become really rare and is a trade I will never attempt again because it has failed way too often.
Here is an example of the recent bear stretch that seemed outright impossible to trade to many, partly because old highs were just run before downside.
Same goes for bottom entries, when people are hoping for a double or triple bottom to occur. It's not like it doesn't ever happen, it's just that too many eyes are fixated on that scenario and unless you are willing to take a "huge" stop loss risk or not put a stop at all you will be stopped out when an old "low" fails and longs have to cover in a cascading downward effect.
What has in fact become "common" today is that old lows are being run ever so slightly before we run back up again. This is especially true in ranges with bearish undertones, where the constant fear of the absolute "impending mega crash" hammers in lower and lower lows that are often not much lower than the previous one - just low enough to spook everybody.
Now, as mentioned earlier there is merit in old lows insofar as becoming points of relevance on the way up again, but not on the way down; they are way too risky.
As we will explore in a upcoming parts of this series it really pays to be second in trading, instead of being the first before the winds have actually started shifting...
Stay tuned ;)
#1 - Trading Coins vs. Trading Futures
#2 - Altcoins vs. Leveraged BTC
#3 - Stop Listening To (Crypto) News (feat. Anton Kreil)
#4 - The Missing Key: Buying High & Selling Low (feat. Tom Hougaard)
#5 - Certainty Doesn't Exist In Trading (Take An Educated Guess Instead!)
#6 - Book-Smart Traders Assume & Lose - Street-Smart Traders Adapt & Win!