Section 5 — Introduction to Fibonacci Levels
Fibonacci retracements use horizontal zones to illustrate areas of support or resistance (demand & supply). They are calculated by identifying the swing high and swing low on the chart. The first at 100% (the swing high/low point), the second at 61.8%, the third at 50%, the fourth at 38.2%, and the last one at 0% (the swing high/low point.) After a significant price movement up or down, the new support and resistance levels are often at or near these Fibonacci levels in between the two swing points. When used correctly Fibonacci retracements and can help predict future price movement and identify key price points for setting up trades.
Fibonacci Retracement Tool
- Measure swing high to swing low
- Identify support/resistance
- 50% and 61.8% are notable levels.
- 70.5% & 76.8% can offer the best risk/reward which can be helpful when margin trading. It’s not confirmed with long term evidence but crypto assets seem to favor the higher fib levels for reversal points.
Swing Low — The middle point of a three candle formation that represents the lowest point price has reached. It is often a wick and it is the point where the sellers were exhausted signaling a reversal in trend.
Swing High — The middle point of a three candle formation that represents the highest point price has reached. It is often a wick and it is the point where the buyers were exhausted signaling a reversal in trend.
Fibonacci Retracement to Demand Zone (Support).
Fibonacci Retracement to Supply Zone (Resistance).
Being able to identify swing points and measuring Fibonacci levels off of them is one way to develop a trading strategy that shows a defined approach and can help with entries, exits, and stop losses.
Here are examples of trade setups on the long and short side with an entry, stop loss, and take profit.
- Entered short trade in the 70.5–78.6 fib level zone.
- Placed stop loss above swing high
- Defined risk with a 4.39 risk/reward ratio.
- Targeting a retracement down to the 70.5 Fibonacci level where price has seen previous support.
- Entered long trade in the 70.5–78.6 fib level zone.
- Placed stop loss below swing low
- Defined risk with a 4.62 risk/reward ratio.
- Targeting a retracement back to the 70.5 Fibonacci level where price has seen previous resistance.
Fibonacci levels can be used on all timeframes depending on the trading strategy (scalping to swing trading). Picking a zone rather than a specific price point to fill orders is a good strategy. Targeting between the 50–61.8 Fibonacci level is a more conservative approach to targeting the higher Fibonacci levels around 70.5–76.8 — it’s all preference and based on the parameters you are using to trade.
Like anything experience and practice are going to yield the best results and instill the most confidence in your ability to manage a trade. Watching price action and using a test account is an excellent way to start to feel more comfortable with using leverage and trading Fibonacci retracements.
Important to Remember
When measuring Fibonacci levels it’s crucial to start the tool at the swing high for a retracement to support and start the tool at the swing low for a retracement to resistance. The higher fib levels should be marked closer to the top and bottom of the resistance and support zones, respectively.