What Is Fibonacci Retracement? How to Use It in Crypto Trading
One of the most critical steps of applying technical analysis to crypto trading is that you want to test the waters and see multiple confirmations for an entry point before you actually enter the market.
Fibonacci Retracement Levels is a technical analysis tool used in financial markets to forecast a level that the price is expected to react to at some point in the future. It is a mathematical formula that is applied to the price of a crypto asset to gain insight into the market and yield accurate market entry signals. This article will explain how it works, and how it can be applied to the crypto market.
What Is Fibonacci Retracement?
In simple terms, Fibonacci retracement is a mathematical formula that is applied to the price of an asset to produce future price levels that the market is expected to react to. This anticipated reaction is for prices to stop their current trend direction and reverse.
Fibonacci retracements come from the famous Italian mathematician Leonardo de Pisa Fibonacci who lived in the early thirteenth century. The name sounds confusing enough, let alone the mathematics behind the retracements. Thanks to the key figures that we can rely upon to give us the levels that we are attempting to find. Fibonacci retracements are a means of intending predictions for future support and resistance levels in the trading arena.
Traders and automated systems use the Fibonacci levels to predict entry and exit levels for currency trading, commodities, stocks, and practically all financial markets. In modern times, this has been related closely to the principle of the Elliott Wave, Tyrone levels, and Gartley patterns. The original pattern on which retracements are built is as follows: One plus one is two. One plus two is three. Two plus three is five. Three plus five is eight. Five plus eight is thirteen. Eight plus thirteen is twenty-one, and so on.
Calculating The Points
In order to chart the exact points where the security will likely change direction, a certain calculation should be made. When the trader draws a trend line from one extreme point to the other, the vertical distance is then divided by the main ratios derived from the Fibonacci numbers. These are as follows:
- 23.6%
- 38.2%
- 50.0%
- 61.8%
- 100.0%
How does Fibonacci Retracement Work
In order to understand Fibonacci retracement levels, you should know something about the Fibonacci sequence. The Fibonacci sequence is derived by adding the two preceding numbers to find the next number. The first two numbers are 0 1; after that, you can add the two preceding numbers to find the next number. So, the third number will be 1, the fourth: 2, the fifth: 3, the sixth: 5, and so on. The sequence develops like this: 0,1,2,3,5,8,13,21,34,55,89,144,233,377,610,987,………..out to infinity.
An essential ratio is obtained by dividing the higher number by the lower one preceding it in the above sequence. Divide 233 by 144; you get 1.618. This ratio is known as the golden mean and is very important. The inverse of this ratio is 0.618. Another important ratio is obtained by dividing any number in the sequence by two numbers higher. So divide 144 by 377, and you obtain 0.381.
Traders use these two numbers in addition to 0.0.5 and 1 as Fibonacci retracement levels. So the Fibonacci retracement levels will be 0, 38.1%, 50%, 61.8%, and 100%. Traders think that price action will tend to find support at these levels. It is another question whether it does or not. Most traders use the number 38.2% as an entry point in the trending market.
Using the Fibonacci Retracement to Trade Crypto
The Fibonacci retracement tool can be used to trade the crypto market effectively and can be applied with the following steps.
- Spot a completed trend. It can be used for both uptrends and downtrends.
- Draw the Fibonacci retracement patterns in the movement of the completed trend. For an uptrend, draw the retracement from left to right in an upward direction. And draw the lines from left to right for a completed downtrend.
- Delay for the price to reverse near the four key levels and concentrate on the key levels for a possible price reversal.
- Enter the trade in the direction of the actual trend. Usually, an uptrend retracement means prices will correct lower. Then, then you can identify one of the four key Fibonacci retracement levels.
Wrapping Up
Fibonacci retracements are resource technical tools that help traders to spot the best market entry points as well as identify support and resistance levels. However, it is important to always combine two or more indicators when trident the market to gain more accurate assessments of trends and make better-informed trading decisions.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
