Trading crypto breakouts on MT4 & MT5

Support levels are the lower price band of a channel that are continuously tested by the market. Again, it can be a straight horizontal level at an approximate price, or it can be a lower band that is created by higher or lower lows. Repeated touches of the support level show the market is testing how strong the price will hold, and when support doesn’t hold, a breakout could unfold.

Resistance levels are an upper price band of a channel that are continuously tested by the market. It can be a straight horizontal level, hovering around a specific price, or it can be a diagonal band created by higher highs or lower highs, depending on the direction of the channel. When price touches resistance, it’s a sign that the traders may be testing the waters for a foray into a new trend.

1. Be mindful of opening or closing out your trades too close to the open of the candle that breaks through. The breakout needs time to be tested. You’ll have more of an indication as to whether the breakout will soldier on towards the end of the next candle.

A fakeout can occur when price tests the support or resistance level and temporarily breaks through, but fails to close past the support or resistance. Essentially, buyers or sellers have had a go at pushing past the level, but there wasn’t enough volume backing the move and price retraces. 

It can also occur where several candles do close past support or resistance, but there is not enough conviction in taking the trend further. So upon the first or second test of the previous resistance or support, the price breaks through immediately and trends back the other way.

Don’t let emotions take hold and make rash decisions based on short term volatility. Have a plan going into the move with a set level of risk and a profit target. Maintain these price levels as your approximate entry and exit points, but you may want to reconsider placing your orders directly on the support and resistance lines.

Cryptocurrencies experience regular spikes and dives, so wait until the market confirms whether they’ll hold or fold.

Checking our RSI indicator, we could see an uptick in buying power as we approached the 4th retest with a reading of around 66, which is generally considered a positive indication, but we were still below overbought conditions. We can see above that after the 4th retest of the 1420 level, price broke out to the upside.

Once the breakout occurs and we have candles closing past the 1420 level, an entry order can be placed. A market order could be used if you were watching the charts, or you can set a Buy Stop order which will get into the trade for you. If you were to use a Buy Stop, it's best to set your entry price a bit higher than the resistance line and/or to make sure any fakeouts don’t catch you off guard, and to account for spread.

Risk management is important. Setting your Stop Loss just below the resistance line of $1420, perhaps around $1400 to avoid any temporary retracements,could have been sensible. Appropriate position sizing is just as important, especially when trading volatile assets like cryptocurrencies. One way to approach position sizing is to open positions that require no more than 2-5% of your balance in margin.

If you had set your profit target to around $1980, which was the height of the start of the channel (around $550), a potential profit of up to 38% could have been achieved, provided you held firm until your Take Profit was met. Alternatively, you could use the MT4/5 Fibonacci expansion tool to find other profit targets.

In the second image above, we drew the Fibonacci extension from the swing low at $580 up to a more recent swing high of $1350, and pulled the extension down to around $950 so that our resistance level of $1420 was touching the 61.8% level. That led to our 100%, 123.6% and 138.2% significant levels being situated at $1710, $1885 and $2000 respectively. Either of these levels could be used as potential profit targets, with the lower levels being preferred for shorter term hold periods.

It’s important to note that the breakout formed after an ascending triangle which took a month or so to form, and so to reach the profit targets mentioned above the trade would need to be in play for 3-16 days to reach the Fibonacci levels, and 18 days for the channel height level. 

This means overnight funding costs will need to be paid to stay in the trades, and this will reduce overall profit. While it does dent the overall profitability of the strategy, it reflects the cost of seeing a decent sized move play out with leverage.

When breakouts occur, previous resistance levels become support, and previous support levels become resistance. In the Ethereum example above, we can see that the $1420 level moved from resistance to support and this level was tested on several occasions in late February. This would have been a key level to watch after a consistent downtrend to see if support would hold. If not, a breakout to the downside could represent a good shorting opportunity.