In a market as volatile as cryptocurrency trading, clear strategy, proper planning, and timeliness are the three cardinals of success. Understanding support and resistance is an important chapter of technical analysis that helps you with decision-making to maximize profit and minimize the risk.
If you are new to the terms, this blog from PCEX Member Knowledge Bank has a simple explanation to make your job easier.
In a layman’s term.
“Support and resistance are price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction”
Continue reading to have a thorough understanding.
Staying true to its literal meaning, support is a price level where the price drop of an asset seizes. The downtrend of the asset price finds support here similar to the apple falling from a tree finds its support on the ground. It’s the natural human tendency to wait for the prices to drop before shopping. However, the shopping supports the price too. The support level mark on the chart indicates the point of entry. This is a critical time when you can buy more assets at a lesser price.
Resistance is the opposite phenomenon. It’s the maximum level on the chart up to which the price is going to increase. In a way, you can say it’s the extreme of a bullish run. This defines the exit point when you can sell the asset to make more profit.
Support and Resistance Vs Trendlines
The concept of trendlines is born out of the support and resistance itself. When you connect a series of prices together, over pivot highs and pivot lows, you get a trendline. The line basically presents a trend. It helps you speculate a trend in either direction – up or down. It helps you with your long-term as well as short-term including intra-day trading. A spike or breakout on the trendlines is fluctuation or a highly volatile period. The space between two trendlines -highs and lows – is called a channel. What does it reflect? A channel depicts the trading range between support and resistance on a price chart.
Can Fibonacci Extension Help Knowing Support and Resistance?
The answer is Yes. Fibonacci extensions are a technical analysis tool applied to set profit targets or estimate how far a price is to move up or down before following a retracement. You can use it to forecast support and resistance levels. The extensions are plotted on a chart by marking price levels based on Fibonacci ratios as follows.
Check out “What is Fibonacci Retracement?” for queries related to Fibonacci ratios, number, and level.
Hope you understood the importance and ways of drawing support and resistance levels on a chart, and the conclusion thereof. Stay tuned to PCEX Member to grab the latest cryptocurrency insights and technical analysis tools.