Fibonacci is a popular technical tool in Crypto trading. It has become an indispensable part of every investor’s tool. In the field of cryptocurrency investment, traders rely on the Fibonacci effect to predict market trends. This article Crypto Trading will explain in detail the concept of the Fibonacci sequence and how to apply it in cryptocurrency analysis. Let’s follow along!
General overview of the Fibonacci effect that traders need to know
Fibonacci is a concept that attracts the interest of many Crypto investors. Fibonacci effect indicators help identify support and resistance levels. It is an important factor in placing orders and setting other trading goals.
Fibonacci definition
Fibonacci is a technical analysis indicator built on Fibonacci numbers and coefficients. This is the research of famous mathematician Leonardo Fibonacci.
In fact, there are many studies related to the Fibonacci concept. However, when applied to forex trading, cryptocurrency, and other fields, we often focus on two main concepts: Fibonacci retracement and Fibonacci extension.
Basically, the Fibonacci sequence is made up of numbers starting from 0 and 1 or 1 and 1. Subsequent numbers are created by adding the previous two numbers together. This series of numbers can be represented as follows: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,…
Important indicator tool in Fibonacci Trading
In technical analysis, the Fibonacci effect is used to determine price levels corresponding to certain ratios. For example, 23.6%; 38.2%; 161.8%; 432.6%; and other ratios. These ratios are based on the Fibonacci number sequence, starting from 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …
From number 3 onwards, if we divide the next number by the previous number, we get similar results. Like: 5/3 ≃ 8/5 ≃ 8/13 ≃ 13/21 ≃ 34/21 ≃ … ≃ 1,618. When dividing the following number by the two previous numbers, we also obtain the same ratio: 5/13 ≃ 8/21 ≃ 13/34 ≃ … ≃ 0.382. The inverse of the golden ratio is 1/1.618 ≃ 0.618 and the difference between it and the ratio 0.382 is about 0.236. The square of the golden ratio is 1.618^2 ≃ 2.618. Cubed is 1.618^3 ≃ 4.236.
In trading, investors often use two types of Fibonacci for more detailed analysis:
- Fibonacci Retracement helps identify price levels where a trend reversal may occur
- Fibonacci Expansion helps predict future price targets.
Fibonacci effect and its meaning in Crypto
Traders consider the Fibonacci effect an indispensable part of the financial sector. This series of numbers is applied to create the ratios or percentages that traders use. Including: 23.6%; 38.2%; 50%; 61.8%; 78.6%; 100%; 161.8%; 261.8%; and 423.6%.
These percentages have many different applications:
- In Fibonacci Retracements, they are used to mark horizontal lines on the chart. Intended to indicate support and resistance areas.
- In Fibonacci extensions, they are horizontal lines on the chart. They show where strong price waves may appear.
- Fibonacci Arcs, similar to compass movements. It originates from the high or low and represents support and resistance areas.
- Fibonacci Fans are diagonals created using highs and lows. In addition, it also represents support and resistance areas.
- Fibonacci Time Zones, are vertical lines on the chart. Used to predict the timing of large price movements in the future.
See more: Fibonacci: magic trading tool for every trader
The influence of the Fibonacci effect and its application in Crypto
The main property of the Fibonacci effect in Crypto lies in the application of the Fibonacci number sequence. Ratios for predicting potential prices of financial assets. Here are some of its specific applications in trading:
- Identify support and resistance levels: Fibonacci numbers and corresponding ratio levels are applied to mark support and resistance levels on the price chart. These levels provide information about price levels where a trend reversal may occur. At the same time, it is where traders can place buy or sell orders.
- Predict potential price levels: Fibonacci numbers and ratios are used to predict potential price levels to which a product may adjust. These factors can return during price moves.
- Identifying buy and sell points: Traders can use Fibonacci ratios to identify potential buy and sell points. Their research and analysis process is often based on identifying support and resistance.
- Identifying market cycles: Fibonacci levels are used to identify market cycles. At the same time, determine the turning point of the price trend.
Instructions on how to effectively use Fibonacci types in coin trading
In this section, we will explore how to use each popular type of Fibonacci effect indicator today.
Fibonacci-Retracement – Fibonacci retracement
Fibonacci retracement is also known as Fibonacci retracement. This is one of the popular tools created from the Fibonacci number sequence. This tool is widely used in Crypto technical analysis. To help investors build trading strategies and choose appropriate target prices or stop-loss prices.
Some popular technical indicators that apply the Fibonacci retracement tool include the Elliott wave theory. Gartley pattern and many other indicators.
When strong bullish or bearish volatility bouts end, new resistance, and support levels often appear at or near key Fibonacci retracement levels. For example: 23.6%, 38.2%, 50%, 61.8% and 100%.
Unlike moving averages, Fibonacci retracements are fixed price levels that do not change. It helps investors easily and quickly identify. This helps traders make more accurate predictions. At the same time, be more cautious when deciding to trade near important Fibonacci retracement levels.
The important way to use Fibonacci retracement lines is that investors need to identify and connect the nearest peaks in an uptrend and connect the nearest bottoms in a downtrend.
Trading Fibonacci Time Extension – time extension
Fibonacci Time Extension, or Fibonacci time extension. This is one of the popular indicators used in technical analysis. This indicator helps investors identify when a significant change in price trend or trend reversal may occur.
The Fibonacci Time Extension chart includes a series of vertical lines corresponding to the sequence of elements in the Fibonacci sequence (1, 2, 3, 5, 8, 13, 21, 34,…).
How to use the extended Fibonacci type is mentioned as follows:
During a specific trading period, investors choose a point to be the bottom of the market. Drag the Fibonacci Time Extension indicator from that bottom point to a point that is the market top, or vice versa. When releasing the indicator, investors will see Fibonacci Time Extension lines displayed corresponding to important levels. For example: 38.2%, 50%, 61.8% and 100%. Through that, investors can predict the area where a reversal may appear at those extended Fibonacci levels.
The Fibonacci Time Extension indicator brings optimal efficiency when applied to long-term price trend analysis. It is also valuable in analyzing short-term price trends.
The more reversal points a chart Fibonacci Pattern contains, the more reliable the chart is.
How to use Fibonacci fan – fan form
Fibonacci Fan, also known as Fibonacci fan form. This is a technical chart formed by three diagonal lines. It helps investors identify important support and resistance levels based on the Fibonacci ratio.
To draw a Fibonacci Fan, users will connect two important points on the chart. From top to bottom if the price trend is down, or from bottom to top if the price trend is up.
See more: OKX: open an OKX account – Reputable crypto exchange
Fibonacci effect and things to note
Things to remember when trading in general and using What is Fibonacci?
- Fibonacci is a measurement tool, not a price prediction tool. This means you need to already predict the trend before using Fibonacci to evaluate your prediction. Therefore, the Fibonacci effect cannot independently predict price trends.
- If you predict the price trend wrongly, using the Fibonacci sequence will lose its meaning. Therefore, this tool is often used to optimize entry and exit points.
- Fibonacci is a simple and easy-to-use tool, so it is recommended to use it regularly to improve your trading strategy.
- Always have a plan to cut losses when necessary. Especially in strong trends, price can break all Fibonacci levels in just one day, even in just a few hours. Volatility in the cryptocurrency market is often very strong, so having a plan to cut losses is very important.
Conclude
Above, Crypto Trading has provided basic knowledge about the Fibonacci effect. This is a tool not to be missed if you want to succeed in the cryptocurrency market. Like other tools, Fibonacci levels help investors make their decisions more easily. However, accuracy and trading results are only relative, it all depends on the experience and knowledge of each trader. Don’t forget to follow our upcoming articles to improve your trading abilities!
Frequently asked questions
What is the Fibonacci effect?
The Fibonacci effect is a phenomenon in technical analysis and financial markets in which the prices of an asset or market often tend to react or follow the Fibonacci sequence ratios. These levels often appear within support, resistance, and other important points on the price chart.
Why is the Fibonacci effect important?
The Fibonacci effect is considered important because it can provide information about strong points in the market. To help traders make decisions based on support, resistance levels and entry/exit points.
What are the popular Fibonacci effect ratios?
Popular Fibonacci effect ratios include 23.6%, 38.2%, 50%, 61.8% and 100%. These ratios are percentages of numbers in the Fibonacci sequence. It is often used to identify support and resistance levels on price charts.
