Cryptocurrency Trading 101: Support, Resistance, and the Fibonacci Sequence
Identifying Support & Resistance with the Fibonacci Sequence.
Whenever cryptocurrency experiences a bear market the internet gets eerily quiet.
Twitter crypto influencers disappear left and right, trading groups are dissolving, and even ETH scam bots aren’t as abundant as they used to be. While many get beaten down by bear markets, disheartened by their losses, I see them as opportunities to learn. When the market isn’t treating you the way you’d hope, look to self-education. The greatest weapon you can arm yourself with after experiencing large capital losses is the knowledge necessary to never let it happen again. Well, at the very least lower the chances of it happening again.
Everyone experiences losses, if you’re watching your altcoin holdings dwindle into nothingness — just know that it happens to the best of us.
I have NEVER met a trader who hasn’t experienced several great losses throughout their career. It’s a part of the game.
You don’t play football thinking you’ll never get tackled. Don’t trade crypto thinking you’ll never take a loss.
I’m using this time to refresh my memory on some technical analysis basics. I’ve written before on trading/investing best practices. Stop by my Medium profile to read The 10 Crypto Commandments and other trading guides I’ve put together.
But I digress…
Support & Resistance
Learning how to identify support and resistance trend lines is arguably one of the most important aspects of trading, and the first thing any aspiring crypto trader should master.
Investipedia defines support as a price level where a downtrend can be expected to pause due to a concentration of demand. When the price of an asset drops, there are more and more buyers that are willing to purchase that asset as the price lowers. That increase in demand as the price falls creates “support”, as buy orders are placed around the lower price levels.
Conversely, resistance is a price level where an uptrend can be expected to pause due to a concentration of sell orders at that price level.
Support and resistance can be determined in many different ways. You can identify support and resistance levels through backtesting- looking at the historical price movements to see where the price has faltered (hit resistance) or where the price has bounced upward from (hit support).
When practicing technical analysis, a support or resistance line can be draw when the trend line hits at least 3 candlesticks (if resistance, the top of the candlestick, if support, the bottom).
Support and resistance lines also tend to form along significant price points, for example, with Bitcoin, we tend to find major support and resistance every $1,000 interval.
Can Support Become Resistance?
Support can also turn into resistance if a price falls below it, or “breaks support”. If a price level falls below a support line, that means the demand for the asset at that price wasn’t strong enough to keep the support intact, and the people who placed their buy orders their are now stuck in positions at a loss.
Fibonacci retracements and patterns are one of my favorite tools of trade when it comes to crypto trading. Fibonacci levels are often used to identify support and resistance levels, so this goes hand in hand with our previous lesson. I’m not going into the history or the math behind Fibonacci retracements, that’s an entire article in itself, but I will tell you how to use them to benefit your trading.
Finding Support Levels
The first step in learning how to use Fibonacci levels to help your trading efforts is to learn how to identify a swing high and a swing low.
A swing high is a candlestick at the peak of an uptrend, the candles on either side of it must have lower lows and lower highs in order for the middle candle to be considered a swing high. A swing low is the exact opposite.
When you identify the swing high and swing low points on a chart, you can use the Fibonacci tool to connect the two points. When you plot from swing low to swing high, you identify support levels.
The space between the two swing points will show support levels based on the Fibonacci sequence of numbers. These numbers, when shown in correlation to the high and low point of a chart, tend to show strong support and resistance lines.
The retracement lines (or support lines) are determined from taking the vertical distance from high to low point and dividing it by the ratios in the Fibonacci sequence.
Using the Fibonacci tool (can be found on TradingView) to plot the swing high to the previous swing low will help you identify support levels.
Finding Resistance Levels
This process is nearly identical to how you find support levels, except this time you’re going to plot from the highest point (swing high) to the following lowest point (swing low).