When someone asks you to think of popular cryptocurrency trading tools, the Fibonacci retracement would be one of the most well-known tools. It helps traders where to place buy and sell orders and is very simple to explain the reason of this highly effective tool. For those traders who knows how to utilize the support and resistance, it can make you into another level of trader.
It’s important to note that the Fibonacci sequence is found in the nature, not thorough our mind like mathematics. You can find these sequence in animal skin, DNA structure, spirals of seashell, etc.
This number sequence produces a ratio of 61.8%, which is commonly refer to as the Golden Ratio, which can be found in many aspects of nature.
The Fibonacci levels that are used within financial trading are 23.6%, 38.2%, 50%, 61.8%, and 100%. However, the Fibonacci levels commonly used in cryptocurrency trading is 38.2%, 50%, 61.8%, and 100%.
But, why are these levels important?
They are psychological barriers that commonly show up in the financial markets. They are called as inflection points where traders tend to predict a bounce or break off a resistance or support. Another interesting fact of Fibonacci levels are that the more the people use them, the more accurate they become.
The most important Fibonacci level is the 0.618, which is called the Golden Mean level by the mathematician. This is a critical level where sellers tend to give up bargain-hunting and a potential mass buying frenzy will ensue.
These are great places to either buy upon a breakout or pull back to after rise. Careful traders won’t put buy orders until the price is 5 to 10% above this Fibonacci level. This is actually recommended for safety of your trading since Fibonacci levels are not always precise.
The Fibonacci retracement levels consists of horizontal lines which are used to highlight areas of expected support and resistance within Fibonacci ratios. To create these levels, you will need to draw a trend line between the lowest and highest point of a particular trading cycle. Then you will divide the area horizontally according to the ratio mentioned above, usually 38.2%, 50%, and 61.8%. It’s free for you to use wicks or candles when measuring the lowest and highest points.
This is a very popular tool among technical traders as it helps you to identify places where they can strategically place buy and sell orders. You’ll find that the market tends to either stay around these levels or breakthrough and uses the old resistance level as a new support.
As mentioned above, Fibonacci levels are not completely accurate by itself. Keep in touch with related news along with other indicators and trading patterns in order to completely win the trade. Just because you bought at level of 0.236 level doesn’t mean that the price is going to rise to 100% ratio. However, if you take these indicators as consideration, you’ll have higher probability to win.
Can Fibonacci Retracement Be Used With Other Trading Tools?
It is actually highly recommended that you utilize Fibonacci along with other trading tools and indicators. If you find that other indicators tend to overlap with the results of the Fibonacci retracement levels, this generally means that your prediction might be correct as support and resistance to be expected.