Fibonacci Retracement

What Are Fibonacci Retracements?

The tool is based on the Fibonacci sequence, a series of numbers where each is the sum of the two preceding ones. Traders use specific ratios derived from this sequence (23.6%, 38.2%, 50%, 61.8%, and 100%) to map levels where prices might reverse or consolidate during a trend.

What Is the Fibonacci Sequence?

The Fibonacci sequence starts with 0 and 1, and each subsequent number is the sum of the previous two. For example:

 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on.

In trading, the sequence isn’t used directly; instead, the key ratios (23.6%, 38.2%, 50%, and 61.8%) are derived from mathematical relationships between numbers in the sequence. The 61.8% ratio, often called the "Golden Ratio," is particularly significant in financial markets.

How Does Fibonacci Work in Trading?

Fibonacci retracement levels are horizontal lines drawn on a price chart to indicate potential areas of support (where the price may stop falling) or resistance (where the price may stop rising). 

Traders use these levels to predict possible price movements within a trend. Here’s how it typically works:

1. Identify significant highs and lows on the price chart.

2. Draw the Fibonacci retracement tool from the high to the low (in a downtrend) or low to high (in an uptrend).

3. The tool automatically plots the key Fibonacci levels on the chart.

In this example, the price went from a low of $471.30 to $793.86. The Fibonacci Retracement tool calculates the retracement levels based on the range selected (low to high for uptrends). The analysis suggests that the dashed lines may act as support or resistance in the future. While all levels may be considered, traders tend to give more importance to the golden ratio (0.618). In this case, the golden ratio indicates that $594.52 is a key level expected to act as support or resistance.

Why Do Traders Use Fibonacci Retracement?

Fibonacci retracement helps traders identify potential entry and exit points in the volatile crypto market. It is especially useful for:

• Predicting pullbacks: During a price correction, the retracement levels suggest potential reversal points.
• Setting stop losses: Traders may use these levels to place stop-loss orders just below key support levels.
• Planning take-profit zones: Levels like 38.2% or 61.8% are sometimes used to plan profit targets.

Fibonacci With Other Indicators

While Fibonacci Retracement can be useful, it is not foolproof. Many traders prefer to combine it with other technical tools like moving averages, RSI, trendlines, and volume analysis to increase accuracy. For instance, if a Fibonacci level aligns with a moving average or a key trendline, there is a higher chance of a price reaction at that price level.