Trading

How to Trade Crypto: Four Strategies for Finding High-Probability Targets

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How to Trade Crypto: Four Strategies for Finding High-Probability Targets

Supply and demand zones; support and resistance levels; last low pre-breaks and last high pre-breaks; and areas of liquidity

By: White Wolf Trader


This tutorial teaches cryptocurrency trading — primarily large and mid caps like Bitcoin (BTC/XBT), Ethereum (ETH), Litecoin (LTC), XRP, and EOS — through price action-based concepts and theories. Price action-based trading (PABT) assumes it’s possible to effectively trade an asset by studying nothing but the movements of price. PABT typically doesn’t involve the use of indicators (like RSI, MACD, or OBV): indicators are considered unnecessary, unhelpful, and/or misleading when it comes to reading markets and planning and executing trades.

Disclaimer 1: The information contained in this post is for educational purposes only; it does not constitute, nor should you consider it as constituting, financial advice of any kind.

Disclaimer 2: It’s possible this article unintentionally contains one or more errors or misleading claims. Always do your own research (DYOR) before entering or exiting a trade.

Disclaimer 3: If you’re new to trading, I highly recommend reading @CryptoCred’s free and comprehensive Study Guide before reading this article.

Crypto-Trading Tutorials
1. Top-Down Market Analysis

2. High Risk, High Reward Consolidation Patterns

3. Four Strategies for Finding High-Probability Targets

Two Never-Violate Rules for Finding Targets and Taking Profit

Before learning how to find high-probability targets — i.e., areas where you should take some or all of your profit whenever you’re in a winning trade — you need to understand two rules about profit-taking:

  1. Only ever enter a trade if the setup presents a potential reward-to-risk (R:R) of at least 2:1.
  2. Always take at least some of your profit at the First Trouble Area(FTA).

The first rule is simple: don’t ever risk money on a trade if there isn’t a reasonable possibility you can gain at least twice as much as you might lose.

The second rule is also simple — at least conceptually:

Always close at least part of your position at the first area where price might start turning against you (i.e., dumping if you’re long or pumping if you’re short). This is known as the “First Trouble Area”.

Where, exactly, the FTA exists on any given chart is one of the things the strategies explored below will teach you.

(Note@CryptoCred and Trader_Dante are the two people from whom I learned about the concept of FTA. Take a look at this thread for some of Cred and Dante’s writings on the subject.)

Taken together, these two rules constitute elements of risk management 101.

Generally speaking, you shouldn’t ever violate either of these rules.

Having said that, all aspects of trading — including the ‘rules’ surrounding take-profit targets— are matters you must ultimately decide for yourself.

With these introductory notes out of the way, let’s now look at four strategies for finding high-probability targets.

Strategy #1: Targeting Supply and Demand Zones

The theory of supply and demand is undoubtedly one of the most important elements of modern economics and financial markets; and this is no different when it comes to trading crypto.

Supply and demand-based trading deserves its own tutorial — if not several of them.

For now, though, and in an effort to keep things as simple and as on topic as possible, I’ll restrict my discussion of supply and demand to the following key ideas.

First, here are some definitions:

  1. SUPPLY ZONEthe area of consolidation that precedes (comes before) a dump/move to the downside/bearish PAA supply zone is sometimes referred to as a ‘bearish consolidation block’ or a ‘bearish 0rder block’.
  2. DEMAND ZONEthe area of consolidation that precedes (comes before) a pump/move to the upside/bullish PA. A demand zone is sometimes referred to as a ‘bullish consolidation block’ or a ‘bullish 0rder block’.

Supply and demand zones exist on all timeframes.

Often, consolidation blocks on higher TFs are more reliable than those on lower TFs; but there are plenty of exceptions to this tendency, especially when there’s confluence between consolidation blocks and key levels of support and resistance.

Second, here are some general rules:

  1. SUPPLY ZONES OFTEN ACT AS RESISTANCEif you’re in a long trade (i.e., you’re expecting price to go up), you should consider exiting your trade at the bottom of a supply zone.
  2. DEMAND ZONES OFTEN ACT AS SUPPORTif you’re in a short trade (i.e., you’re expecting price to go down), you should consider exiting your trade at the top of a demand zone.

Third, here are some charts showing examples of supply and demand zones:

Finally, here are a few more rules about supply and demand zones:

  1. In general, the more times price runs into a supply or demand zone, the weaker the zone becomes, i.e., the more likely it is the zone will fail to push price down (in the case of a supply zone) or to prop price up (in the case of a demand zone).
  2. Sometimes, when price pumps straight through a supply zone (i.e., an area of consolidation that we expect to act as resistance), price will then briefly return to this ‘failed’ supply zone from the upside and then bounce off it in a bullish manner. This is sometimes referred as a ‘bullish bre@ker’.
  3. Sometimes, when price dumps straight through a demand zone (i.e., an area of consolidation that we expect to act as support), price will then briefly return to this ‘failed’ demand zone from the underside and then reject at it in a bearish manner. This is sometimes referred as a ‘bearish bre@ker’.
  4. Consolidation blocks that precede violent PA (i.e., big moves) often produce bigger reactions when price returns to them in the future than do blocks that precede weak PA (i.e., small moves).
  5. In some cases, a supply or demand zone will comprise a single candle. An example would be the final down-candle that precedes a violent move to the upside (i.e., a bullish 0rder block).

Strategy #2: Targeting Support and Resistance Levels

Like supply and demand zones, targeting support and resistance levels is one of the most reliable methods for finding high-probability take-profit areas.

There are (at least) three main ways of using support and resistance levels to successfully plan exits for your trades:

  1. Targeting previous levels of support and resistance.
  2. Targeting confirmed S/R or R/S flips.
  3. Targeting potential S/R or R/S flips.

For clarification purposes:

  • An S/R flip is where a previous level of support flips into resistance.
  • An R/S flip is where a previous level of resistance flips into support.
  • confirmed flip is where a level of price has evidently (plainly) flipped from S into R or from R into S.
  • potential flip is where a level might flip from S into R or from R into S but the flip hasn’t happened yet.

(Trading potential flips is risker than trading confirmed flips. However, in some cases, there will be only one opportunity to close a position at a specific level — i.e., when price wicks into the level only once and then moves in the opposite direction — and so you might miss your chance to close if you want for ‘too much’ confirmation.)

Here are a couple of charts showing how to target previous levels of support and resistance:

Here are two charts showing how to trade S/R and R/S flips:

Note: in the chart directly above, there was an opportunity to long the retrace of $0.00164850 (i.e., at step 2.), anticipating an R/S flip. It would have worked out well in this case—although there was a bit of slippage on the first two bounces. To be clear, though, resistance does not flip into support on every retrace (nor does support flip into resistance on every retrace). The safest approach is to wait to see if a previous resistance level starts acting as support before entering a long (or vice versa before entering a short). This will likely lead to some missed opportunities, but it was also prevent some bad trades.

Strategy #3: Targeting Last Low Pre-Breaks and Last High Pre-Breaks

The last low pre-break (LLPB) and last high pre-break (LHPB) approach is one of my favourite strategies for finding high-probability areas to take profit.

My experience suggests it’s one of the most reliable methods for successfully exiting trades.

The LLPB and LHPB approach is based on the theory mentioned near the beginning of this article, i.e., that of the First Trouble Area (FTA).

Simply stated, the FTA theory insists you should take some — if not all — of your profit at the first area of PA where price might start moving against you (i.e., dumping if you’re long or pumping if you’re short).

LLPBs and LHPBs are examples of FTAs.

First, here are some definitions:

  1. LAST LOW PRE-BREAKThe lowest low price makes right before it dumps (i.e., drops to the downside).
  2. LAST HIGH PRE-BREAKThe highest high price makes right before it pumps (i.e., expands to the upside).

Second, here are the rules of how to trade LLPBs and LHPBs when it comes to picking targets and closing positions:

  1. The LLPB is where you close your long positions because the former often acts as resistance.
  2. The LHPB is where you close your short positions because the former often acts as support.

(LLPBs and LHPBs can also be used for entries; but that’s a discussion for another day.)

Here are some charts demonstrating how to trade LLPBs and LHPBs:

Strategy #4: Targeting Areas of Liquidity

The final strategy for finding high-probability targets involves hunting other people’s stop-losses, i.e., attempting to close your trades by putting your take-profit orders as close as possible to where other people likely have their stop-losses resting.

This is a rather complicated strategy; it requires familiarity with a variety of concepts — including liquidity, market makers, order flow, and stop-loss placement — in order to fully understand and use it effectively.

Unquestionably, it deserves its own article; and perhaps I’ll write one at some point.

For now, however, I’m going to keep things extremely simple by addressing only the bare minimum ideas you need to know about in order to start working with this strategy.

First, go watch @CryptoCred’s video on Institutional Order Flow right now.

It’s the best explanation of liquidity and stop hunts I’ve ever seen, and I wholeheartedly suggest you watch it several times over (and take notes whilst doing so).

Second, you need to grasp the following facts about PA:

  1. Big traders — the people and institutions that move price — need liquidity in order to fill their orders. If nobody is willing to sell to the big traders, the latter can’t enter or close their large long positions; if nobody is willing to buy from the big traders, the latter can’t enter or close their large short positions.
  2. Retail (small) traders aren’t exactly lining up to gleefully help market makers earn profit. In order to get around this ‘inconvenience’, big traders ‘force’ retail traders to give up their money by pushing price to areas where retail traders likely have their stop-losses resting.
  3. Many retail traders place their stop-losses above swing highs or below swing lows, i.e., areas from which price reverses. Practically, this usually means placing a stop-loss above an upside wick or below a downside wick that forms an apex.
  4. Big traders understand this, which is why they often push price above swing highs or below swing lows only to then force price in the opposite direction. In other words, market makers will push price above a key high, trigger the stop-losses of people who are in short positions (and trap people who FOMO into longs on the ‘breakout’), and then cause price to dump back from whence it came. The reverse scenario happens often as well: market makers will push price below a key low, trigger the stop-losses of people who are in long positions (and trap people who FOMO into shorts on the ‘breakout’), and then cause price to pump in the opposite direction.
  5. If you start thinking about market movements as reflecting the efforts of big traders to push price from one group of stop-losses to another, you’ll get a better idea of not only where you should not place your own stop-losses but also where you should try to close your positions and take your profit.

Third, here are some guidelines for finding targets by hunting other people’s stop-losses:

  1. Set your take-profit order immediately above a local high or immediately below a local low. For example, if the local low on BTC is $10981, set your take-profit target at $10981.10. Don’t get greedy by trying to squeeze a little more profit out of a trade: close your position directly above a local high or directly below a local low, and move on to the next trade. You will get burned if you ignore this advice.
  2. Think about where other trades — especially newer traders who might have learned some counterproductive ‘classic’ trading advice —are likely to set their stop losses, and place your take-profit orders there. These areas might include swing highs/lows, directly above/below consolidation blocks, and points people are likely to consider (rightly or wrong) as forming breaks in market structure.
  3. Place your take-profit orders directly above or below areas where other traders are likely to FOMO into breakouts (whether real or fake).

I’m not going to post any charts here because 1) Cred’s video features plenty of visual examples and 2) you’ll be able to make sense of everything I’ve said above if you merely read it a few times over and then take a look at some charts yourself.

Be sure to pay particular attention to the tendency for price to spike just above a swing high or just below a swing low before then reversing completely. This, my friends, is evidence of a stop-loss; and it reflects how you, too, should think and trade.

Final Word

There are, of course, other strategies for finding targets than the four reviewed herein.

I consider the ones I’ve covered in this tutorial to be the most effective as well as the most important for new traders to learn and practice.

Nevertheless, other approaches include:

  • Trend-based fib extensions (important for trading alt coins);
  • Historical pivot points (which can provide insight into potential support and resistance levels); and
  • Volume profile in concert with the VPVR tool in TradingView (which helps you see the exact prices at which the most buying and selling occurs — again, potentially useful for determining support and resistance).

Summary

Here’s a brief summary of the key ideas discussed in this article:

  1. Only ever enter a trade if the setup presents a potential reward-to-risk(R:R) of at least 2:1.
  2. Always take at least some of your profit at the First Trouble Area(FTA), i.e., the first area on a chart where you can reasonably expect price to start moving against you.
  3. A supple zone is the area of consolidation that precedes (comes before) a dump/move to the downside/bearish PA. A supply zone often acts as resistance when price runs into it from the underside. When you’re in along trade, set your take-profit order at the bottom of a supply zone.
  4. A demand zone is the area of consolidation that precedes (comes before) a pump/move to the upside/bullish PA. A demand zone often acts as support when price runs into it from the top side. When you’re in a short trade, set your take-profit order at the top of a demand zone.
  5. Take profit at established support levels and established resistance levels.
  6. Pay close attention to potential or confirmed S/R and R/S flips. Generally speaking, if you’re in a long trade and price is pushing up into a previous support level that has since been lost, you should take some or all of your profit at that level. Similarly, if you’re in ashort trade and price is dumping into a previous resistance level that has been lost, you should take some or all of your profit at that level.
  7. The last low pre-break (LLPB) is the lowest low price makes right before it dumps (i.e., drops to the downside).
  8. The last high pre-break (LHPB) is the highest high price makes right before it pumps (i.e., expands to the upside).
  9. The LLPB is where you close your long positions because the former often acts as resistance.
  10. The LHPB is where you close your short positions because the former often acts as support.

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