The electronic money (crypto) market attracts a large number of investors to participate with the desire to make a profit. However, to be successful in this field, investors are required to equip themselves with the necessary skills. One of the most commonly used useful tools is the Fibonacci number sequence. This article will provide you with detailed instructions on the Fibonacci formula along with specific illustrated examples in the crypto market. Find out now with Crypto Trading.
What is the Fibonacci sequence?
The Fibonacci sequence in crypto is a sequence of natural numbers starting from 0 and 1, each subsequent number is equal to the sum of the previous two numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 , … In the crypto market, this series of numbers is used mainly in technical analysis to predict potential support and resistance levels of asset prices.
The most popular tools related to the Fibonacci number sequence in crypto are Fibonacci retracement and Fibonacci extension.
- Fibonacci retracement: Used to identify price levels that are likely to correct or recover after a strong move in a certain direction. The retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Traders use these levels to find entry points when prices are correct.
- Fibonacci extension: Used to determine likely price levels to be reached after a major trend has been completed. Popular extension levels are 161.8%, 261.8%, and 423.6%. Traders use these levels to find profit-taking or exit points.
Fibonacci spiral
The Fibonacci spiral is a logarithmic spiral. Created by drawing spiral lines starting from a central point and continuously expanding outward in golden ratio proportions. The Golden Ratio is a special mathematical ratio, approximately equal to 1.618.
Applications of the Fibonacci spiral:
- The Fibonacci trading spiral helps predict potential price levels on the price chart. The points on the helix usually correspond to support and resistance levels.
- By applying the Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 100%) to the price trend. The trader can identify points where the price is likely to reverse.
- The Fibonacci spiral helps determine target price levels during an uptrend or downtrend. Supports setting up take profit or stop loss strategies.
See more: Fibonacci: magic trading tool for every trader
Fibonacci formula
When a cryptocurrency is in an uptrend, we can use Fibonacci levels to predict price retracements. To calculate Fibonacci levels, we take the highest point (peak) and the lowest point (bottom) of the price trend. Then, apply popular Fibonacci ratios like 23.6%, 38.2%, 50%, 61.8%, and 100%.
Example Fibonacci formula
Let’s say the price of Bitcoin just increased from $30,000 to $40,000. We can calculate Fibonacci levels as follows:
- 23.6% level: $40,000 – (($40,000 – $30,000) * 0.236) = $37,640
- 38.2% level: $40,000 – (($40,000 – $30,000) * 0.382) = $36,180
- 50% level: $40,000 – (($40,000 – $30,000) * 0.5) = $35,000
- 61.8% level: $40,000 – (($40,000 – $30,000) * 0.618) = $33,820
These Fibonacci levels can act as potential support and resistance levels. Investors can monitor these levels to decide to buy when the price drops to support levels. Or sell when the price rises to resistance levels.
For example, if Bitcoin price drops near $36,180 (38.2%), investors can view this as an ideal buying point, predicting the price will bounce back from here.
Method to find numbers in the Fibonacci sequence
There are many methods to find numbers in the Fibonacci pattern, each method has its own advantages and disadvantages. Here are two popular methods of finding numbers in the Fibonacci sequence:
Pascal’s Triangle method
Pascal’s triangle is a triangular structure constructed of integers, each number being the sum of the two numbers immediately above it. It starts with the first row being 1, the second row being 1, 1, the third row being 1, 2, 1, and so on.
The relationship between the Fibonacci sequence and Pascal’s Triangle lies in the sum of the diagonals in Pascal’s triangle. When adding numbers along the diagonals starting from the vertex of the triangle, we will obtain numbers in the Fibonacci sequence.
In the Fibonacci sequence, the Fibonacci numbers can be found by adding the elements on the descending diagonals in Pascal’s triangle. This can be seen clearly in the illustration below. Consider the first element ‘0’. Subsequent numbers can be calculated by adding the elements on the diagonal, as shown above.
Fibonacci Sequence and Golden Ratio
The golden ratio (also known as the Fibonacci ratio) is a special mathematical ratio, approximately equal to 1.618. This ratio can be used to find numbers in the following Fibonacci formula sequence :
F(n) = (Φ n – (1-Φ) n )/√5
With:
- F(n) is the nth number in the Fibonacci sequence
- Φ is the golden ratio (about 1.618)
- n is the position of the number in the Fibonacci sequence
For example: To find the 5th number in the Fibonacci sequence, we have:
- F(5) = (Φ 5 – (1-Φ) 5 ) / √5
- F(5) = 5
See more: MEXC: Open a MEXC account, invest effectively
Application of Fibonacci formula
Fibonacci levels help investors determine entry or exit points:
- Support: When the price drops to the Fibonacci levels, this can be an ideal buying point.
- Resistance: When the price rises to the Fibonacci levels, this may be a reasonable selling point.
For example, if the price drops near the $13,090 level (38.2% level). Investors can view this as a buying point, predicting the price will bounce back from here.
Benefits of Fibonacci:
- Identify potential price levels based on Fibonacci ratios.
- Make reasonable buying and selling decisions.
- Optimize profits and reduce risks in crypto trading.
By using the Fibonacci formula, investors can improve trading efficiency. And optimize your investment strategy in the Crypto market.
Things to note when applying the Fibonacci calculation formula:
- The Fibonacci formula is an aid, not an exact prediction tool.
- Requires combination with other technical indicators and fundamental analysis.
- Investors should research and learn how to use the Fibonacci formula carefully before applying it to actual trading.
Conclude
In short, mastering the Fibonacci formula and how to apply it will help you have more insight into the growth and trends in the crypto market. From analyzing trend lines to predicting reversal points, the Fibonacci sequence offers powerful tools for investors and traders. Hopefully, through this article, you have a better understanding of Fibonacci and how to use it effectively. Don’t forget to visit Crypto Trading now to update more good knowledge about trading.
Frequently asked questions
What is the Golden Ratio?
The golden ratio (also known as the Fibonacci ratio) is a special mathematical ratio, approximately equal to 1.618. This ratio is found in many natural structures and is considered the most aesthetically pleasing ratio.
How to apply Fibonacci to the crypto market?
The Fibonacci formula can be used to identify potential support and resistance levels in the crypto market. The two main ways to do this are Fibonacci retracements and Fibonacci extensions.
Example of how to use Fibonacci retracement in the crypto market?
Suppose Bitcoin price is in a downtrend and has formed two bottoms at $30,000 and $25,000, and a top at $40,000. Apply the 38.2% Fibonacci retracement level for the period from $25,000 to $40,000. We have potential support at $33,800.
