Trade Like a Psychic with Fibonacci Tools
This guide is sponsored by Prime XBT, the leading Bitcoin-based margin trading platform. All links to Prime XBT in this guide are referral links.
Written in collaboration with CryptoYoddha
What would you do if you could predict, with surprising accuracy, what price will do in the future?
Using Fibonacci tools, you can easily identify areas where the price will bounce or change direction.
These tools are easy to learn and can usually be used at no additional cost to you. On quality trading platforms such as PrimeXBT, it is common to have these Fibonacci-based tools available for free.
The tools are based on the Fibonacci sequence. This is a series of numbers in which each number is the sum of the two numbers before it. It was introduced to the west by 13th-century Italian mathematician Leonardo Fibonacci. This series of numbers can be observed in everything from flower petals to starfish to architecture to financial markets.
In this guide, we will learn how to use the Fibonacci retracement and Fibonacci extension tools to predict future price levels and plan your entries and exits with greater precision.
Fibonacci Retracement Tool
No chart goes in one direction forever. Sooner or later, price has to pull back. The Fibonacci retracement tool allows you to predict how far that pullback will likely go.
To use the retracement tool, you will have to click on two points. In an uptrend, the first point is placed at a swing low, and the second point is placed at a swing high.
The image below shows how to draw a Fibonacci retracement during an uptrend on PrimeXBT.
In a downtrend, the first point is placed at a swing high, and the second point is placed at a swing low.
The image below shows how to draw a Fibonacci retracement during a downtrend on PrimeXBT.
The lines that appear on the chart are the Fibonacci retracement levels. These are areas where price is more likely to find support or resistance and before changing direction. To extend the lines and make them easier to use, you can place the second point at the same price level, but a little more to the right.
There are three ways to enter trades using these Fibonacci retracement levels.
A. Enter the trade at the 0.382. 0.5, or 0.618 levels. These are the areas used by many traders, which makes them likely levels for price to stop.
B. After price bounces at a retracement level, wait for confirmation by entering after price goes above a resistance level.
C. After price bounces at a retracement level, wait for even more confirmation by entering after price goes beyond the 0 level (above swing high in an uptrend, below swing low in a downtrend).
Fibonacci Extension Tool
We now know how to find great entries for our trades, but we still need to know where the best places to take profit are. The Fibonacci extension tool helps you to predict price levels that price is likely to reach if it continues with the current trend.
On PrimeXBT, this tool is called the Trend-Based Fib Extension and can be found by clicking on the Analysis page, which gives you free access to a wider range of technical analysis tools.
To use the Trend-Based Fib extension, you will have to click on three points. The first two points are placed at the beginning and end of a move as if you were using the Fibonacci retracement tool. The third point is placed at the level that price retraced to before reversing. For convenience, this third point can be placed a little further to the right while maintaining the same price level to extend the lines drawn.
The levels that appear are probable reversal points where price may change direction or at least stop temporarily. Depending on the strength of the trend, you may choose to take more of your profit at the closer 0.382–0.786 targets. In a stronger trend, you may choose to take more of your profit at the 1 or 1.618 levels and beyond.
The picture above extends the lines drawn in the previous graphic demonstrating how to use the Fibonacci extension tool. We can see that it has correctly predicted many key areas of support/resistance well in advance, including the 0.786 level at $8360, 1 level at $9039, and 1.618 level at $10998.
Conclusion
The Fibonacci retracement and Fibonacci extension tools allow you to easily predict probable and profitable entries and exits for your trades.
To improve your accuracy even further, you will want to incorporate other forms of technical analysis to find areas of confluence with a Fibonacci level.
For example, if a 0.618 Fibonacci retracement in an uptrend coincides with a strong support area and the Stochastic also looks ready for a reversal, then the 0.618 level may be a good area to enter.
These Fibonacci tools can be applied on all timeframes and all markets, including cryptocurrencies, commodities, forex, and indices. If you are ready to practice using these tools on live charts, visit PrimeXBT, where you can trade all these markets with Bitcoin collateral and built-in charting tools.
