Support & Resistance are prices that the market has observably reacted with or will likely react with. Support prices are prices where buyers have stepped into the market in large enough numbers to stop downward movement and have forced the market higher. Resistance prices are prices where sellers have stepped into the market in large enough numbers to stop upward movement and have forced the market lower.
When the market has moved into unchartered territory, where no preexisting Support or Resistance prices have been defined we can use the Fibonacci Retracement tool to draw Fibonacci Extensions to find new price points that the market will very likely react with, this is useful for setting Take Profit targets on our positions, entering new trades and for making sure that we aren’t entering our trades at a sub optimal price.
Support & Resistance prices derived from the Higher Time Frames (TFs) are always more important than those found on Lower TFs. The Higher TFs are the 4 hour, Daily, Weekly & Monthly charts. If e.g. you’re entering Bullish trades based on Support prices found on Lower TFs (e.g. 1/5/15/60 minute charts) when the Primary Trend is Bearish, when the Daily & Weekly Moving Averages are showing that the market has a Bearish profile, then you are stacking the odds against yourself. Chances are that price will break below those Lower TF Support prices more often than not. Checkout my articles about Moving Averages in the Tutorials menu.
As we can see in the chart above there is a clearly defined area of Support at $5,860 > $6,000. If price were to have a sustained drop below such a clearly defined area of Support this would signal to us that Bullish probabilities have been drastically cut at least until the observable evidence has improved. A sustained drop below Support can be defined as a closed Daily Candle with a closing price below the clearly defined Support price.
When clearly defined points of Support & Resistance have been found such as the prices at A & B on the chart below we can draw a Fibonacci Retracement as soon as a few days after point B has formed to project Resistance levels in to the future, if this lines up well with known Resistance levels then that adds further to the probability that price will react with this level. As indeed is the case below, we can see that the Fibonacci Retracement tool predicted the future sell off that happened at the 0.618 Fib level. Checkout my article about the Fibonacci Retracement tool in the Tutorials menu.