If you are familiar with crypto trading, you’ve probably heard of technical analysis. The cryptocurrency markets, just like every other financial market, are prone to volatility and unpredictability, which is why some traders use technical analysis to figure out when to enter the markets for a profitable trading opportunity.
Technical analysis, brought into the financial markets by American journalist Charles Dow - who’s also the founder of the Wall Street Journal, is all about using past market data to figure out the future of a particular asset or the market overall. The basic theory of technical analysis is this: in terms of market trends, history repeats itself. Therefore, if the market is following a particular trend right now, it’s very likely that it’s simply repeating a trend seen before. So if a trader analyzes previously seen market trends using past data, it’s possible to predict future trends accurately and surmise when to enter the markets for an advantageous trade.
For financial analysis, crypto traders use a range of tools known as technical indicators. With technical indicators, it’s possible for traders to formulate profitable trading strategies. Fibonacci retracement levels are one of the often-used technical indicators within the crypto markets; it’s based on the Fibonacci sequence discovered over 700 years ago. If you’re interested in crypto futures trading, the Fibonacci retracement is a technical indicator you can use to come up with trading strategies that suit your objectives.
In this post, we give you all the details regarding Fibnoacci retracements in crypto and how to use them. But first, let’s find out what exactly the Fibonacci numbers are, shall we?
First Things First, What Are the Fibonacci Numbers?
Leonardo Pisano, who was nicknamed Fibonacci, was a famous Italian mathematician. In his book Liber Abaci, he talked about a quite simple sequence of numbers - that later came to be known as the Fibonacci numbers, and that is now used as the basis of the Fibonacci retracement technical indicator.
Now, what exactly are these Fibonacci numbers? They are any series of numbers where every digit is the sum of the two numbers that come right before it.
For instance, if you start with the two numbers 0 and 1, the sequence would go like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, and so on and on.
What Are the Fibonacci Retracements?
Coming to the Fibonacci Retracement technical indicator, it uses Fibonacci ratios as percentages that, when plotted upon a chart, can show probable support and resistance zones, among other areas of interest to traders. There are Fibonacci retracement levels on the technical indicator, shown by horizontal lines each of which stands for a Fibonacci ratio as a percentage. The most commonly used Fibonacci ratios are these: 0%, 23.6%, 38.2%, 61.8%, 78.6% and 100%.
For instance, when assessing support and resistance levels for a certain trading pair, traders use 0.618 (the inverse of 1.618) in their Fibonacci retracement by converting it to a percentage (61.8%). This percentage makes up a horizontal line on the price chart to point out possible support and resistance levels. Similarly, when you subtract 61.8% from 100%, you get 38.2%, which forms another significant level for support and resistance.
The 50% mark is not technically a Fibonacci ratio, but it is still used by some cryptocurrency traders since it symbolizes the middle point of the price range. Further, sometimes Fibonacci percentages below 0 or above 100 are also used, such as 161.8%, 261.8% or 423.6%.
What Is the Fibonacci Retracement Trading Indicator Used for?
Fibonacci Retracements are good for figuring out a lot of things; to start off, traders can make use of this technical indicator to find out the best spots to place orders to enter a particular market for profitable trade and make stop-loss orders. Fibonacci levels are also frequently used to root out where new support and resistance levels might be when there’s a big shift in the value of a crypto asset, as mentioned earlier.
How to Use the Fibonacci Retracement Technical Indicator in Crypto Trading
Well, now that we have an idea of what the Fibonacci retracement technical indicator consists of, let’s see how it’s used in the crypto markets.
Now, generally, the technical indicator has two significant points on a price chart that the instrument is drawn between - one high and one low. This range is the basis for all further analysis. The Fibonacci retracements tool usually points out various price levels inside of this given range, but in some cases, the instrument might also provide details regarding significant price levels outside of this range.
There are two primary ways to draw out the range on the Fibonacci Retracement technical indicator according to an underlying trend. They are:
- During an Uptrend: At the time of an uptrend, the low point on the Fibonacci Retracement tool is 100% or 1, and the high point is 0% or 0 (as shown in the image below). By drawing Fibonacci retracement levels over an uptrend, the technical indicator gives trades insight regarding plausible support levels that might be tested if the market starts to retrace.
- During a Downtrend: In a downtrend, exactly the opposite is done, which means the low point on the chart would be 0% or 0, and the high point is 100% or 1 (as you can see in the image below). Since the price is in a downtrend, the retracement would be pointing to the movement from the bottom. In this case, the Fibonacci retracement technical indicator might help figure out possible resistance levels if the market begins to go up.
There are multiple methods for traders to set up the Fibonacci retracement tool based on their crypto trading strategy and objectives. The technical indicator can also be combined with other tools for technical analysis for more accurate results, such as the Elliott Wave Theory.
And there was everything you needed to know about the Fibonacci retracement tool. To find out more about crypto futures trading, you can give our website a visit! You can also find us on Twitter, Facebook, LinkedIn, and Telegram.
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