Historic price level can ruin you if you are not prepared for them. Here is what you need to know to avoid that.
Some important price levels can be deducted from the chart. Resistance and support levels, for example, are made clearly visible by the markets failed multiple attempts to break through them. As a trader you can easily see these price levels and adjust your trading accordingly.
Sometimes, however, there seems to be an invisible barrier the market refuses to break for no reason. These invisible barriers can be created by historic price levels you cannot see in your current chart because they date too far back. Historic price levels are often valid over a very long time, which is why you have to know the history of the asset and the market you are trading. At and around historic price levels the market will behave somewhat strangely in a very unique way. If you are unaware of the historic price level, this strange behavior can cost you a lot of money.
Historic price levels are price levels that have some historic significance, most importantly historic highs and lows. Media analysts often mention made up price levels like a “52-week high” or a “one-year low”. These levels have no implication for real-life trading. You can ignore them and focus on significant price levels like an all-time highs and all-time lows.
Because historic price levels are broken so rarely, they are often forgotten by many traders that focus on such short time frames as with binary options traders. Still, historic can dominate market behavior for weeks and months. If you ignore an approaching historic price level, your ignorance can force you into a long losing streak that can potentially ruin you.
Depending on whether the historic price level is above or below the current market price, it works as a very strong resistance or a very strong support. While the market approaches the price level it is likely to get more erratic. This first part of the markets behavior is very similar to other support or resistance levels. Still, historic price levels appear as a challenge to some traders, which makes them want to break the level. The erratic period before breaking the price level is therefore relatively short.
When the market has broken the historic price level, however, it is unlikely to create a strong breakout, as you would expect with other support and resistance levels. This is due to market psychology.
When long-term and medium-term investors reach a new historic price level, they realize how far the market has moved and take their profits. In a rising market, they sell their assets and create supply, which will lead to falling prices. In a falling market, they get out of their short positions and create demand, which will lead to rising prices. The market is therefore likely to fall back under the historic high or climb back over the historic low.
This is a very unique situation. The trend, that pushed the market to the new historic price level, is now considerably weakened. Still, the historic price level scares many investors to invest again. In an uptrend, there is not enough new demand to push prices higher. In a downtrend, there is not enough new supply to drag prices further down. There is, however, no momentum in the other direction either. The market is therefore very likely to enter a continuation pattern and that after it has broken the historic support or resistance level.
If you are unaware of the historic price level, this kind of market behavior makes no sense. If you recognize the resistance or the support in the market, you would expect the market to break out after it broke through the resistance / support.
The following continuation pattern could trick you into thinking the market has reversed. All in all, these misconceptions could lead to many bad trading decisions and could cost you a lot of money. Therefore, you have to make sure to know your markets historic price levels, even if you rarely encounter them.