Learn to Trade; OH sh*t, I can’t believe it's free! Part 4.

By Trader Fibonacci Fiddsy

If you missed Part 3 of Learn to Trade; OH sh*t, I can’t believe it's free!, click the link below to head back. Within each article is a link back until you get back to the beginning of the series!

Learn to Trade; OH sh*t, I can’t believe it's free! Part 3.

Support and Resistance continued!

Let's talk about Trend Lines, EMA’s/SMA’s & Fibonacci Retracement levels!
In case it isn't obvious — these all act as support and resistance levels.

I’ll try to power through this while trying to keep it as simple as possible!

Trend Lines.

I guess the easiest way to view trend lines is to think of horizontal support and resistance except its angled rather than horizontal.

A trend line is created when a line is drawn between two points.
Point A to point B create a trend. If price hits the trend line again then point C confirms the trend. As a general rule, the more times the trend is tested — the higher the chance the trend will break. This rule is also true for horizontal support and resistance as well.

While I personally believe horizontal support and resistance is the most important and consistent levels to trade off, trend lines become the building blocks for common trading patterns.
We’ll visit that in part 5 but let's take a look at a few examples of trend lines on both higher and lower timeframes.

BTC/USD on the Daily Chart

We are heading back in time a little with this one but it's a great example of a longer-term trend. Point C’s area acted as resistance on multiple days before breaking the trend, it then (it is a little hard to see on this screenshot) retested the trend line which acted as support before price ran bullish.

BTC/USD on the 4hr Chart

Another oldie but goodie! This trend line and area around the trend line acted as pretty strong resistance for around a year. Eventually the trend line was successfully broken, had a retest and pushed bullish!

BTC/USD on the 1hr Chart

Here is an awesome and very recent (at time of writing this) example on BTC. Yellow trend line has acted as strong support while the white trend line has acted as strong resistance which — common theme — flipped to become support. This has also created what's called a channel. A savvy trader would have made many successful trades by buying when price was at the yellow trend line and selling when price was around the white trend line. An experienced trader would have been flipping long and short each time the trend lines were touched, making money and successful trading in both directions while price bounced inside of the channel.

It's Important to note that Trend lines are not exact levels, they can be quite ‘subjective’ depending on how you draw them or adjust them. Some people draw their lines off the candle wicks, others of candle closes... Some a combination of the two! It's for that reason why there’s a small portion of the trading community that will swear trend lines are a joke.

However, in my opinion — they are idiots.
The simple fact is that trend lines work and it's another weapon to the trading arsenal. The reason they work is because the vast majority of traders use them, so they become a self-fulfilling prophecy.

SMA’s & EMA’s

Simple Moving Averages & Exponential Moving Averages
These are very simple yet effective indicators. SMA’s (also just known as MA’s) and EMA’s plot a line based off the average price of the last X number of candles.

The most commonly used SMA’s and EMA’s are the 10, 20, 50, 100 & 200.
Using the 50 SMA as an example means that the line plots off the average price of the last 50 candles (usually the closing price average of the last 50 candles depending on the settings).

EMA’s on the other hand — while they work in a similar way — they take more weight in the more recent candles.

I'm not going to bother to show the calculations — a quick google search should do if you are curious!

Personally, I prefer using EMA’s because they react faster to recent PA (price action).

Please look below at the difference between the 50 SMA & 50 EMA.

50 EMA & 50 SMA BTC/USD 4hr Chart

The White line is the 50 SMA and the Yellow line is the 50 EMA. You should be able to see based off this chart that the EMA reacts faster to changes in price due to how it calculates. You should also be able to notice that both the SMA & EMA are acting as support and resistance.

SMA 20, 50, 100 & 200 BTC/USD 4hr Chart

White line is the 20 SMA, Orange line is the 50 SMA, Yellow line is 100 SMA and Blue line is the 200 SMA. Even without having a closer look, it should be very obvious that the moving averages have acted as support and resistance.

EMA 20, 50, 100 & 200 BTC/USD 4hr Chart

White line is the 20 EMA, Orange line is the 50 EMA, Yellow line is the 100 EMA and Blue line is the 200 EMA. Once again, as mentioned on the screenshot above — these levels continue to act as support and resistance.

Both EMA & SMA 20, 50, 100 & 200 BTC/USD 4hr Chart

Just wanted to throw this one in so you can see the difference between the SMA’s & EMA’s overlapping.

EMA 20, 50, 100 & 200 BTC/USD 4hr Chart

EMA 20, 50, 100, 200 zoomed in to show how these levels act as support and resistance — Tho mostly support in this case as we are in a bullish market!

Using the SMA vs EMA is going to come down to personal preference.
Both are important levels and in case this isn't obvious... The higher the SMA & EMA, the stronger the support/resistance will be at these levels!

The two most important SMA’s/EMA’s are the 50 and the 200. When these two lines cross, its known as a ‘Golden Cross’ or a ‘Death Cross’.

A Golden Cross is when the 50 is below the 200 SMA/EMA but crosses to be above the 200 SMA/EMA — this signifies a bullish trend reversal.

While a death cross is the exact opposite and signifies a bearish trend reversal.

I personally do not trade the Golden or Death Cross because the price action and reversal has already happened — it's just a confirmation on what should already be apparent!

Now for one of my favourite tools!

Fibonacci Retracement

If you ever want to do a deep drive on some crazy stuff and get lost in a very deep rabbit hole, I suggest spending some time looking to Fibonacci numbers! Just prepare to have your mind blown!
The best thing is these numbers work in trading and that’s all you need to know.

The reason the Fibonacci Retracement tool is one of my favourite tools is because some of my largest and most profitable trades over the past 7 years in this market have been bought or sold based off Fibonacci levels.

Fibonacci Retracement levels can be used on all time frames and are excellent for planning entries or even re-entries into trades. With Fib extensions, you can use them as TP (Take Profit) targets as well!

How to draw Fibs!

It’s pretty simple, in an uptrend — you draw from low to high.
In a downtrend — you draw from high to low.
In trader's terms — you start at the swing low and finish at the swing high for a bullish market and the opposite for a bearish market.

I am going to use some ‘over the top’ examples from ETH in the 2020–2021 bull run.

Picture #1 ETH/USD 1 Day Chart — Uptrend example

As the picture says — in an uptrend — draw from the low / start of the run to the top of the run. This is an exaggerated example.

Picture #2 ETH/USD 1 Day Chart — Downtrend example

As the picture says — in a downtrend— draw from the high / top of the run to the bottom of the run. This is an exaggerated example.

OK! Now that we have drawn them, I would advise you to start playing around with your Fibonacci Retracement settings.
This can include extending your Fibs horizontally, changing colours, adding Fib extensions (positive or negative values) or remove certain Fib levels.

My Fibonacci retracement looks nothing like the default settings, we will have a quick look later with some settings suggestions.

Below, let’s have a look at the horizontally extended Fib levels acting as support (or resistance).

Picture #1 ETH/USD 1 Day Chart —extending Fibs horizontally.

Hopefully now that you have a better understanding of support and resistance, you can see clearly how these Fib levels has acted as support and resistance.

Picture #2 ETH/USD 1 Day Chart — extending Fibs horizontally.

As above, Tho this example is in a down trend — these levels have acted a support and resistance.

Thats great Trader Fibonacci Fiddsy but now what?

Right — I have to be careful here…
I am going to slightly pivot and instead of just identifying these key levels, we’ll talk a bit on how to use these levels and which ones!

I used long term exaggerated examples in the pictures above.
If I was to zoom in and change the timeframe to a low timeframe — the same rules apply. But for now, we’ll stick the same pictures from above!

Traders typically look for the area between the .5 and .618 for their entries.
This is known as the Fibonacci ‘golden zone’. In this zone, they look for signs of reversal or multiple confluences before taking the trade.

Picture #1 example of the ‘Golden Zone’

I don't want to give too much away but the .618 also happens to be lining up with some old support/resistance @ $1750. There are also some candle patterns mentioned in the earlier series that you might be able to identify AND there’s some common charting patterns we will cover in part 5.

Picture #2 example of the ‘Golden Zone’

If you were short from the top and looking for re-entry on the trade or alternatively were looking to short in the down trend on a high time frame swing trade, then an entry off the ‘golden zone’ would have been an excellent area to short from.

Now I really don't want to contradict myself here, but it's been my observation from my time in the market that high caps (especially Bitcoin) rarely pull back to the .618. More often than not (other than the odd large and vicious liquidation event), price is pulling back to the 0.382 and 0.5 areas — into the golden zone on occasions.
However, mid cap and low cap alt coins will often pull back to the 0.618 or even further to the 0.786 on a regular basis.

My favourite Fib zone to trade is actually the ‘Golden Pocket’ which is within the 0.618 and 0.65. I could once again go down a rabbit hole on this — but I won’t!

During the 2020–2021 bull market, I did very well, and a lot of my targets for my long-term holding accounts were based off Fib extensions and Fibonacci negative value extensions.
I am going to show some examples of how I was able to pick near tops and bottoms in 2020–2021.

Fibonacci Extensions and Negative Value Extensions!

I have actually come back and edited/added to this section to remove confusion between Fibonacci Retracement Extensions and Fibonacci Extensions based off negative values.

There is a difference — Fibonacci Retracement Extensions map targets based off the depth of the retracement — the swing high to the swing low (in an uptrend). While Fibonacci extensions, map negative Fibonacci levels based off the swing low to swing high.

First, we will start with traditional Fibonacci Retracement Extensions, how they work and how to use them!

Fibonacci Retracement Extensions

We now know that we draw the Fib level from low to high in an uptrend to get our potential retracement support levels.

Step 1 — Draw from low too high to get your Fibonacci retracement levels.

Quick example of Drawing in a Fibonacci Retracement, ideal entry is the Golden Zone between the .5 & .618 — In this case, trade probably would have been taken off the .5 level.

But the question remains, how do we know where to take profit?
This is where we can now use Fibonacci Retracement Extensions.

Step 2 — draw a new Fibonacci retracement from the swing high to the swing low of the retracement.

We had our entry based off the swing low to high and possible retracement levels, but we now have a target based off the actual retracement depth.

Even with the default settings, we can see by using the pre-built in extensions, we have the 1.618 level as a possible target (1 & 1.618 are the two main desired TP levels).

Sure enough, price hit the 1.618 level.

Here is the same example but scrolled out with the next run and next retracement.

Should be a couple of very obvious signs here.
We are in a clear uptrend (HH & HL) and retracements are pulling back into our golden zones for optimal entry.
We can also use the Fib Extensions for areas to TP (take profit) as drawn in this picture above.

Yes, these extensions can be used in a downtrend as well.
I’ll use the example on ETH/USD that I used to point out the golden zone in a downtrend.

Example of using extensions in a down trend

Swing high to swing low to get out retracement entry levels, in this case was the .5 level aka ‘golden zone’.
Then drawing from swing low to high of the retracement to get our extensions.
As you can see, the first target (value ‘1’) was hit followed by the optimal level of 1.618 was reached.

Using Fib Extensions to mark out possible market tops!

Let's go to the BTC/USD chart from the 2017 bull run and draw the Fibonacci Retracement from market top to market cycle bottom and see if these levels can predict the following market cycles top?

Market top/high to market bottom/low.

Now that we have done this, we’ll scroll out and see where the Fib Extension levels 1.618, 2.618, 3.618 and 4.236 acted in the 2021 bull run.

Should be pretty clear that these levels acted as important levels for both support and resistance throughout the following bull run, all based on the previous cycles high to low.
In fact, the 3.618 almost nailed the market top.

While these levels might not give exact tops, they do give key market levels which is extra important when a coin is in price discovery (making new all-time highs) where there isn't any historical support or resistance.
These important levels often do become market tops.

Fibonacci Extensions — based off negative values.

Using negative value Fibonacci extensions is not the conventional way of using Fib levels but I personally have found these excellent with my trading style and has in fact increased my profitability.

One thing I love about these fib extensions is you are able to plan out TPs and also retracements in a single drawing.
Adding the negative values of -0.236, -0.382, -0.5, -0.618 & -0.65 for the golden pocket will give continuation targets based off the swing low to swing high. You can also add negative numbers past those levels, and I would actually suggest adding the -1 & -1.618 at a minimum as well.

We are going to see a colour change because I am using one of my custom templates, but I am actually using the exact same chart ETH/USD and Fib levels that I used as an example for Fib retracement extensions further above.

Fib Extension levels acting as support and resistance — Great areas to take profit.

We can see that by using the negative values, the single drawn Fibonacci retracement has not only given us possible retracement entries but also possible TP (take profit) targets. If entering on the ‘golden zone’, all TPs would have been reached.

For these next examples, I am going to go to the daily on Bitcoin and travel back in time to the last bull run cycle.

Example #1 using Fibs and Fib extensions (Negative Values).

Bitcoin had its first major pullback from 42k back to 30k (ish). This allowed us to draw our bull cycle targets beyond the 2017 bull market from low to high. There was a lot of confluence at this level (30k) from multiple sources and indicators which made 30k an optimal level to enter (or re-enter) the BTC trade.

Why enter at the 0.382 and not wait for a deeper pull back?

I know this is starting to get messy but I'm doing this to show that not only was it at the 0.382 Fib, that support also happened to line up with a BIG ROUND NUMBER @ 30k and if you look closely, the 50 SMA & EMA both also act as an area of support — that means that there were 4 levels of support at the same area. There are even more reasons to enter here but general rule is the more things that line up (aka-confluence), the higher the probability of a successful trade.

Example #2 The Next chapter — Bottom to Top Fib retracement trade plan

Now we have an excellent example of a Golden Pocket trade. That BIG ROUND NUMBER @ 30k that ended up acting as support from the earlier run is now well and truly ‘confirmed support’. Admittedly, if you were being conservative, you could be scaling out of this trade at various Fib levels before hitting the previous top level.

I sold a large portion of my holdings at the golden pocket take profit zone, unfortunately I did not sell all my BTC as I still had higher targets which did not hit. I sold the rest after major levels were broken and market structure changed. Was still very profitable for me and a lot of my targets were based off Fib Extensions and Negative Fib Extensions.

Comparing the Two!

Let's compare some examples of Fib Retracement Extensions VS Fib (negative value) Extensions!

In this case, both managed to pick the top — the white lines are the 1.618 & 2.618.

However, in this case you would have only hit the 1.618 with conventional retracement extensions while the negative value fibs hit the market top.

Using both Fib extensions to pick key ‘next’ cycle levels

This has already been touched on further above, but we’ll chart some Fib levels for future key area’s this next bull run — it should be an interesting exercise to come back to this in a couple years' time!

Step 1

Step 2

Step 3

Step 4 — ZOOM OUT!

These are some of my key target areas for the 2024 bullrun. These are only preliminary targets based off the previous cycle and where we are with current prices/cycle, more fibs will be drawn in during the bullrun to get more precise zones & levels. These are just current areas of interest and also perhaps possible tops!

Take special note of areas of confluence where multiple Fibonacci levels line up!

Also — while I may favour the negative values — you should use both, as both are super important in identifying key levels of support and resistance.

DOUBLE & TRIPLE FIB OVERLAYS

Yep... You can layer multiple fibs to find out even stronger zones of support/resistance.
Admittedly, these are not the clearest or cleanest examples but I’m going to run with the same BTC daily chart of 2020–2021 bull run.

Double Fib Overlay

That golden pocket from ‘Example #2’, when overlayed with the Fib levels from ‘Example #1’ show that the .382 was also in that ‘golden pocket zone’. The next major area if that failed would have been the Examples #1 golden pocket with the .786 from ‘example #2'.

Triple Fib Overlay

Here we have 3 Fibonacci retracements overlayed. Please have a close look so you can once again identify those same two zones with bunched up Fib levels, The next picture we will actually zoom out and see how those levels have acted up until current price action.

LET'S ZOOM OUT!

Many of these levels and zones could and can be used for entering, exiting or taking profits. Sometimes you might get 2 or 3 Fib levels be at the same price, when this happens — it’s going to act as strong support or resistance. And if it lines up with other forms or support and resistance? EVEN BETTER!

ALL TIME FRAMES

As I mentioned earlier, Fibonacci Retracement Levels work on all timeframes, in this example below — I legit just picked a random section on the 4 hourly chart and used the Fib with Fib extensions.

If you had bought BTC and taken this trade from in the golden zone or the golden pocket, you would have hit all Major TP’s (Take Profits) on this swing trade.

Charting Wicks VS Bodies on Fibonacci Levels

Now related but not related, the reason I draw off wicks and not closes is mostly because one time frames wick is another timeframe close, a wick on the weekly might actually be a close on the daily etc. When I’m raising orders at Fib levels, I’m not waiting for candle closes at fib levels to enter the trades.. Say I take a trade off the .618 being support, I’m getting filled at that level regardless if it wicks or closes at that level as often price will bounce/wick off those levels. I’m hoping for a bump and run off that level, if I waited for a close, id miss 90% of my fib retracement trades. Same theory applies to using these fib extensions for TPs, I’m not waiting for a close to TP, I’m hoping my limit orders are hit and filled!

Profit Taking

My general rule of thumb is the deeper the Fibonacci retracement, the earlier my scale out TPs will be (eg 1, -0.236, -0.382, -0.5 etc) while if the retracement is shallower, say the .382 or even the .236, I am looking for -0.382, -0.5 and -0.618+, etc). You will have to play around and see what works with your trading style.

Fibonacci Retracement Settings.

This is more on the personal side, but you can play around with everything in the settings to see what resonates best with you…
I’d highly suggest extending the lines to the right.
Trend line is just a preference.
This is my ‘FibonacciFiddsy Full Template’ which is my one stop shop fib retracement settings. However, please understand, I also have around 5 other custom fib templates — yes, you can save multiple templates and switch between them depending on your needs. Below is my ‘Full’ or ‘everything included’ settings. You may only want to add the extra negative values -.234, -0.382, -0.5, -0.618 and -0.65 values for now.

Customise the colours to suit — below is my personal settings!

I like clean charts so I remove the shading aspect but when starting out, you might find it beneficial to keep the shading in for now as a stronger visual reminder.

Fibonacci Speed Resistance Fan

Will only briefly touch on this — but once again — these Fibonacci lines can be used as support and resistance, just like trend lines.

Optimal zones are the .618 & .75

Speed fan from same low to new high.

Fibonacci speed retracement fans are good and effective, but I don’t use them as much anymore. I like my charts clean and as minimalistic as possible with as much information as a require — so I tend to only check the speed fans on occasions in some of my TradingView saved layouts.

UP NEXT — Part 5!

We’ll take a look at common trading patterns, look deeper into some more important structures and how to trade them — including measured moves — and we will also begin looking at other indicators to use in TradingView.

DISCLAIMER

NOT FINANCIAL ADVICE– The Information in this article, learn to trade; Part 5 of my ‘OH sh*t, I can’t believe it's free!’ series, is provided for educational, informational, and entertainment purposes only. The Information contained in or provided from or through this article is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice.

The Information in this article is general in nature and is not specific to you the user or anyone else. You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented in this article without undertaking independent due diligence and consultation with a professional broker or financial advisory.

You understand that you are using any and all Information available on or through this article at your own risk.

RISK STATEMENT– The trading of Bitcoin, alternative cryptocurrencies has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice.