What is the Fibonacci retracement? How to use it in crypto trading
The Fibonacci retracement tool is often used in technical analysis to predict possible future prices in the crypto market. It is a confirmation tool that can help you achieve better trading results when used with other indicators, and this is how you use the Fibonacci retracement tool in crypto trading- change.
What is the Fibonacci retracement?
The Fibonacci retracement is an important crypto-trading technical analysis tool that provides insight into when to execute and close trades or place orders and limits. The indicator uses percentages and horizontal lines to identify important support and resistance points during an uptrend or downtrend. You can use it as part of a crypto trading strategy.
The price does not move in a straight line; it goes through a series of recoils, forming something like a zig-zag pattern. In an uptrend, for example, the price does not continue to rise; it moves up and back before continuing the upward movement. This pattern occurs continuously in a trend.
Many crypto traders use the Fibonacci retracement tool to check for possible places where a price pullback may find support or resistance. A pullback, also known as a retracement, is a temporary reversal in the trend of the crypto market. It differs from a reversal in that it is only a short-term move against the trend, followed by a continuation of the current trend.
Understanding Fibonacci Numbers
Fibonacci is all about numbers, and these are the key values to watch.
The Fibonacci Sequence
The Fibonacci number sequence was discovered by Leonardo Pisano, also named Fibonacci. He documented them in his book, Liber Abaci“The Book of Numbers”, which he published in 1202. The sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
The series is derived by adding the two contiguous numbers to form the next. With that in mind, you can assume that the next three numbers in the sequence will be 233, 377, and 610.
Fibonacci Golden Ratio
One of the notable things in the sequence is the ratio between the numbers. Each number is approximately 1.618 times larger than the previous number. The 1.618 derivation is known as the golden ratio. The term “golden ratio” is not only based on the derivation of the sequence, but also because the ratio is reflected in almost everything around us.
Fibonacci numbers appear in DNA molecules, reproductive patterns, hurricane patterns, tree branches, and more. For example, looking closely at the petals of flowers, you will find that an intact buttercup has five petals and lilies have three, which are Fibonacci numbers.
Using Fibonacci Numbers in Cryptocurrency Trading
Just as Fibonacci numbers are evident in everything around us, so are they in trading. Crypto traders use the Fibonacci retracement tool to identify support and resistance points when trading. The tool is made up of numbers derived from the differences between the numbers in the sequence. Numbers include 0.236, 0.382, 0.618, and 0.786.
We have already described how the ratio 0.618 is obtained: by dividing a number by the previous one. Dividing a number by two other places higher in the sequence will give approximately 0.382. For example, dividing 21 by 55, 89 by 233, and 233 by 619 will give us approximately 0.382.
Using the same pattern, dividing a number by another number three places higher in the sequence will yield approximately 0.236. Thus, the ratios 0.236, 0.382, 0.618 and 0.786 are formed from the difference between the numbers. They can also be expressed as percentages like 23.69%, 38.2%, 61.8%, and 78.6%, respectively.
Another important number typically used in the Fibonacci retracement is 0.50 or 50%. It is not derived from the Fibonacci numbers, but was considered an important point for a likely reversal based on other theories.
From the image above, we can see that the price has bounced off the 0.618 Fibonacci level and the uptrend has continued. The Fibonacci level of 0.618 served as support for the price in the chart.
Apply Fibonacci Retracement to Your Crypto Trades
The Fibonacci retracement tool is relatively simple to use. You just need to choose low and high price movements that are relevant to your analysis and the price at which you are trading.
The choice of the two points must be made carefully to obtain an accurate measurement. In an uptrend, you should attach the tool to the lower relevant price of the low swing and connect it to the higher relevant price of the high price swing. Conversely, you should connect it to the relevant high and low prices of the last trend in a downtrend. As simple as it sounds, doing it wrong will give you a bad result.
The chart above shows how to use the Fibonacci retracement in an uptrend. We have drawn the line from point 1 to point 2. The two points are the important highs and lows before the retracement. The price then retraces and bounces off the 61.8% Fibonacci level (0.618) to continue higher.
We drew the Fibonacci line upwards in the example above. In the case of a downtrend, we would draw the line down. In other words, in an uptrend, you should draw the Fibonacci line from the last relevant swing low to its high. In a downtrend, it is the reverse.
The information you get from retracement levels will help you determine possible support and resistance points, and what you do with this data depends on your trading strategy.
Using the Fibonacci Retracement in Trend Trading
Many traders use Fibonacci retracement levels in combination with the trendline and other technical indicators as part of their trend trading strategy. They use the combination to make low risk entries into an ongoing trend and form a confluence which helps in making better trading decisions.
In trending trades, traders expect the trendline to form resistance in the case of a downtrend and support, in the case of an uptrend, causing the price to bounce off the line several times. of trend. Although there is no certainty that the trend line will serve as intended, drawing a Fibonacci retracement line can serve as an additional indicator to check for the possibility of a continuation of the trend after the price has reached the low. trend line.
The chart above shows that the price has bounced off the trendline several times. Let’s imagine a case where the trader is not sure that the trendline continues to serve as resistance before the third bounce in the picture above. The trendline having a confluence with a strong Fibonacci line would have propelled more confidence in the trader to execute the trade. The continuation of the trend that followed would not have been a surprise.
How you use the Fibonacci retracement depends on your crypto strategy
You can also use the Fibonacci retracement tool with other technical indicators, including candlestick patterns, oscillators, volume momentum, moving averages, and more. Some people use it with price action to trade trend reversals and countertrend trading strategies. These traders do not wait for the price to reach the support or resistance of the Fibonacci retracement, but rather use the levels to determine when to secure their profit. Some other people also find the Fibonacci retracement tool confusing and a waste of time and prefer not to use it.
We used the 61.8% Fibonacci level in all the charts we used as examples. However, which levels to use depends on your strategy. You can form your crypto trading strategy around different Fibonacci levels depending on what works for you. How best to use this technical tool for the best crypto trading result is up to you.