Fibonacci retracements are one of the techniques in crypto-analysis that are mainly used by traders. While this technique can be very effective in determining entry and exit positions in the market, it can also be risky if you’re not using it in the right way.
So, what is a Fibonacci retracement? What are its uses and advantages, and how to use this technique correctly? This article will help you to understand Fibonacci Retracement and how to find it on crypto price movements.
Terms That You Need To Know
Before understanding what Fibonacci retracement is, you need to understand terms that mostly appear in this article when explaining this technique, including:
- Resistance. An asset condition experiences a high point before the price will decline.
- Support. An asset condition experiences its lowest point before the price will increase.
- Swing low. The state of the candlestick is at the highest point compared to other candlesticks.
- Swing High. The state of the candlestick is at the lowest point compared to other candlesticks.
- Uptrend. Commodity prices tend to increase when pulled from their lowest point. Later a commodity will have a row of peaks and hills with an uptrend.
- Downtrend. The condition of a commodity is experiencing a decline. Later, certain commodities will have a series of peaks and hills with a downward trend.
What Is a Fibonacci Retracement?
The Fibonacci retracement is a series of numbers called the Fibonacci numbers. The purpose of Fibonacci retracements is to show support and resistance levels in the price of an asset. This technique applies to cryptocurrency, stocks, and forex.
These numbers were first introduced in Europe by the famous mathematician Leonardo Pisano (Fibonacci). The numbers form a sequence known as the Fibonacci Sequence. Each number in the sequence is the sum of the last two numbers before it. They follow the pattern 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and others.
While the Fibonacci retracement levels are 23.6 percent, 38.2 percent, 61.8 percent, and 78.6 percent, some traders add a 50 percent value which isn’t a Fibonacci number but can guide when the retracement drops midway between 38.2 and 61.8 percent.
A pattern is drawn between the high and low points. The numbers then show the support and resistance levels between those points.
How To Calculate a Fibonacci Retracement Line
As an example of using Fibonacci retracements correctly, we will use the ETH/USD chart above.
As you can see, the retracement was drawn from point A (low) to point B (high). The Fibonacci numbers are arranged from 23.6 percent at the top down to 78.60 percent at the bottom.
You can see that the price of ETH went up from A to B and then retraced to the 50 percent level. If ETH is in a clear bull trend (requirement to use Fibonacci), it will make a lot of sense to buy Ethereum. The reason is, the bounce occurs at 50 percent, which, according to some traders, is very profitable even though it is not a Fibonacci number.
However, the ideal situation is a bounce to occur on a Fibonacci number, say rated at 61.8 percent. Then later, it will be set as a stop loss, below which the uptrend is unlikely to continue.
Take profit will then be set when it is rising to coincide with another Fibonacci number, say it is in the position of 23.60 percent.
It can also be used in a downtrend, but the pattern is reversed, with the retracement being bounced to a higher low.
How to Use Fibonacci Retracement Correctly
There are two requirements to use the Fibonacci retracement indicator correctly.
First, the market must be in a clear bull or bear trend. The crypto must have higher highs and higher lows in an uptrend. In a downtrend, the asset must also be at lower lows and lower highs.
With such a clear structure, the figures can be easily applied to support and resistance levels, providing clear potential entry and exit points for the trade.
Second, this technique should be used with other indicators such as the Relative Strength Index (RSI). The RSI confirms where the asset has been overbought and down in price, assuring that a bounce is likely to occur. The Fibonacci retracement technique can be misleading without complementary indicators and bring you big losses.
Other Fibonacci retracement indicators that are best used besides the RSI are moving averages, volume, and other relative strength indicators. When used correctly and combined with the right indicators, the Fibonacci retracement technique can help maximize profits and reduce the risk of losses.
The Advantages of Fibonacci Retracements
Fibonacci retracement is a technical indicator that, if used correctly, can definitively tell a trader when to enter and exit the market with very little chance of loss.
Although many traders find this technique confusing, it can be very profitable if used correctly and in an exemplary scenario.
The Risk of Using The Fibonacci Retracement Technique
Although the Fibonacci retracement is very reliable, it takes time to understand this indicator. If it is not well understood, it can be very risky to use it. That is the reason why traders are not advised to use it unless they know precisely how to properly use the Fibonacci retracement technique.
