Why are previous highs and previous lows important key levels?

Yesterday, I shared that in a trending market,
if the trend is a strong trending market,
especially moving in the 1 to 3 o'clock direction,
then my commonly used method involves using moving averages,
especially the EMA20.
The logic behind this is that before a structural change occurs in the trend,
it will continue, unless the structure is broken.
So,
apart from that, there is another trading method I often use,
and I am sharing it here today as well.
That is, when a certain asset keeps rising,
then begins to pull back,
but during the pullback,
it pierces or breaks below a previous structural level.
The so-called structural level refers to the recent low.
At this point, if it rebounds again,
I would prefer to wait until the asset breaks above the previous high
before entering a long position.
Sometimes, I even short based on some reversal signals.
Someone might ask,
Isn't it better to go long on the pullback?
Why wait for a breakout of the previous high?
My understanding is this:
If the asset is very strong,
then during the pullback, it will inevitably hold the key structural level,
meaning that strong consensus funds in the market will buy at these levels.
For example, levels like EMA20 or
EMA30 will be defended by strong consensus.
But if these levels are not defended,
it proves that the bearish force is stronger.
Then, if the market rebounds at this point,
you need to be cautious, as it might form a secondary top.
Let's look at many famous double tops in the market,
most of them were formed in this way.
For instance, Figure 2 shows Tencent's weekly chart.
In February 2021, it formed a high of 713 HKD,
and in September 2025, using that as an anchor, it formed a secondary high of 684 HKD.
Also, Figure 4 shows crude oil (previous high in 2022 and secondary high in 2026).
So,
generally, at such a level, it's better to wait.
If it breaks through,
it proves that the bulls ultimately prevail over the bears.
At that point, entering has a higher win rate.
If a downward reversal signal appears,
you can actually short at such a key level.
And shorting at such a level is a position with
relatively high risk-reward ratio,
because the loss is very limited while the profit potential is greater.
Generally, the risk-reward ratio is above 3:1.
For example, in Figure 3, $HYPE
actually, no one knows if this level will break through.
But based on the principle of prioritizing key levels,
the cost-effectiveness of shorting here is obviously greater than that of longing.
#btc #q #xau #cl #Tencent