In the Crypto world, Fibonacci retracement and extension are some of the most important technical analysis tools. Let’s explore more about how to apply Fibonacci with Crypto Trading. This can help you predict potential buy and sell points, as well as create specific price targets in financial trading. Stay tuned!
Overview of 2 types of Fibonacci retracement and extension
In Crypto technical analysis, two important concepts, Fibonacci retracement and extension, play a vital role in determining support and resistance levels. As well as predicting entry and exit points in the market. Here is an overview of these two types of Fibonacci:
What is Fibonacci retracement?
Fibonacci Retracement is a popular tool that many technical traders love. It helps identify strategic points to place trades. It also provides price targets or stop losses. After price movements, support, and resistance levels often appear near these Fibonacci levels. Notably, Fibonacci Retracement levels are usually fixed and do not change like moving averages. This makes it easier for traders to identify important price points.
Remember that price movements in the cryptocurrency market are driven by market sentiment and the forces of supply and demand. Traders are interested in Fibonacci levels because of the concentration of liquidity there. This results in more traders paying attention, which increases liquidity.
There are many ways to use Fibonacci Retracement levels to set stop losses or targets. It depends on each trader’s specific trading strategy.
Fibonacci Retracement Levels
- 0.236 Fibonacci Retracement Level: This is a good level for high-momentum trades. Where the trend is usually accompanied by high volume. Avoid trading against other resistance levels in the crypto market.
- 0.382 Fibonacci Retracement Level: This is a less important level. Often the market will move to the 0.5 Fibonacci level.
- Fibonacci Retracement 0.5: This is one of the most important and effective retracement levels of the Fibonacci tool. It reflects the moving average and attracts many algorithms. Traders buy and sell at half the price.
- 0.618 Fibonacci Retracement Level: Combined with the 0.5 Fibonacci level, it creates a pretty effective entry and exit level. The market usually fluctuates between 0.382 and 0.618. This is where the most optimal pullback trades take place.
- 0.786 Fibonacci Retracement Level: This is one of the least important retracement levels. It is usually a sign that a trend has passed and retracement trades should not be made. Entering a trend at this level is usually less profitable.
Fibonacci Retracement Levels
How to calculate Fibonacci retracement levels
The Fibonacci Retracement tool is built-in on top cryptocurrency trading platforms. Eliminates the need for manual calculations.
Let’s start with a sequence of numbers starting from 0 and 1. Then continue adding the sum of the previous two numbers to create the next number. If we continue this process, we will create a series of numbers called the Fibonacci sequence. So What is the Fibonacci sequence?
For example, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987…
Although the Fibonacci sequence is not used directly on charts, Fibonacci Retracement ratios are largely based on this sequence. For example, dividing one number in the sequence by the next Fibonacci number produces a ratio that is approximately 0.618.
Similarly, dividing a number in the sequence by the number two places to the right will produce a ratio of approximately 0.382.
What is the Fibonacci extension?
Fibonacci Extension, also known as Fibonacci extension. This is a technical analysis tool used by traders. To set profit targets or predict how far the price may move after a pullback is over. Fibonacci extension ratios also mark areas where the price may retrace.
Fibonacci Extension Levels
The default Fibonacci Extension levels are 0, 0.236, 0.382, 0.5, 0.618, 0.764, 1, 1.236, 1.618, 2.618, 3.618, and 4.618. Among them, traders often focus on some important ratios. For example: 0.618, 1, 1.618, 2.618.
The Fibonacci Extension tool shows the extension level that the next price wave can move to after a pullback.
Potential profit targets typically range from 0.618 to 1.618.
Fibonacci ratios are not only popular in financial markets but have also been observed in galaxy formations, architecture, and even the way some plants grow. Therefore, many traders believe that these ratios have significance in financial markets as well.
See more: Fibonacci: magic trading tool for every trader
The basic difference between Fibonacci retracement and extension
In a price trend, when using Fibonacci Extension and Retracement, you can use Fibonacci Retracement to determine the stopping point of a correction in the trend. While the Fibonacci Extension is applied to locate the stopping point of the price when the main trend returns.
In the case of an uptrend, Fibonacci Retracement is used to determine the endpoint of a downward correction. At that point, the trader will open a buy order in the hope that the price will return to the original trend.
In the case of a downtrend, Fibonacci Retracement is used to determine the end point of an upward correction. Traders often open sell orders in the hope that the price will continue in the downtrend.
Therefore, Trading Fibonacci Retracement helps traders identify entry points during a trend correction. While the Fibonacci Extension helps to locate the next price target of the main trend. In other words, the Fibonacci Extension can help to identify the boundaries of the main trend after each correction ends.
If you have opened an order using Fibonacci Retracement, then Fibonacci Extension will be the tool to determine the take profit or exit point.
Detailed instructions on how to draw Fibonacci retracement and extension
Here is a detailed guide on how to draw these two popular Fibonacci levels:
How to draw Fibonacci retracement
In Crypto, Fibonacci Retracement is applied to detect support and resistance levels in the chart.
This helps traders determine the start or end of a trend. Within the time frame, they are studying. However, this information should be understood as relative. Because a trend can start from a very high price or even from a low price of any trading asset.
Once the tops and bottoms of the trend have been identified, traders can apply the Fibonacci sequence to the chart. By drawing the 0% and 100% lines at the two extreme points of the price chart. They can then add Fibonacci Retracement levels at points such as 23.6%, 50%, 61.8%, 76.4%, and 78.6%.
For example, in the Crude Oil chart below, the 123.68 level was identified as the peak at A. It marked the beginning of a downtrend. The 90.56 bottom at point B represents the end of this period. By drawing Fibonacci Retracement lines between these two extreme points. We can identify support and resistance levels, as illustrated below.
How to draw Fibonacci extensions
Drawing and creating Fibonacci Extension levels have many similarities. It can be easily compared to Fibonacci Retracement. However, unlike Fibonacci Retracement, when drawing a Fibonacci Extension, you need three points instead of two.
Similar to Retracements, the peaks and troughs at the extremes of a trend are used as the first two points to draw the Extension line. However, the third point will not be determined until the market completes the initial Retracement. From there, a prediction of the new trend high or low can be made. The peak or trough of this correction will then be used as the third point to draw the Fibonacci Extension level.
In the example in Figure 2, we observe that both the bottoms and tops of the downtrend in Figure 1 are still defined by points A and B. The market may then make a corrective move up to 101.88, point C, before starting to retrace back to the original downtrend.
We can then draw Fibonacci Extensions from points A and B, and continue through point C. The Fibonacci Extension levels are projected downwards. They can be used as potential support levels.
See more: OKX: open an OKX account – Reputable crypto exchange
Pros and cons of Fibonacci retracement and extension
| Fibonacci retracement | Fibonacci Extension | |
| Advantage | – Quite popular in the Crypto trading community.
– Helps traders better understand market behavior. – Provides an effective means of verification. |
– Assists in determining target levels and stop loss points.
– Provides a view of the potential strength of the trend. – Used to predict potential support and resistance points. |
| Defect | – Fibonacci retracement levels lack adequate mathematical and theoretical foundations.
– Considered a self-fulfilling prophecy. – Requires in-depth knowledge of Fibonacci to use effectively. |
– There is no sure way to know which Fibonacci extension will play an important role.
– Sometimes times price may react from the Fibonacci extension level without any reaction. – The accuracy of identifying tops, bottoms, and retracements depends on the trader’s experience. |
Conclude
Above, Crypto Trading has provided readers with information about Fibonacci retracement and extension. This can be an important part of your trading strategy. By paying attention to the strengths and weaknesses of both, you can create a suitable trading plan and optimize your profit opportunities. And don’t forget to follow our website to look forward to upcoming articles!
Frequently Asked Questions
What are the most important Fibonacci levels in Crypto trading?
The most important Fibonacci levels typically include 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These are common levels used to mark support and resistance levels on price charts.
How are Fibonacci Extensions Used in Crypto Trading?
Fibonacci extensions are often used to predict the next price levels that the price may continue to move to after reversing from a specific level. Fibonacci extension levels are often applied from important bottoms and tops on the price chart.
Are there specific applications of Fibonacci retracement and extension in Crypto trading?
Fibonacci retracement and extension are often used to identify important price levels, shape price trends, set profit targets and stop losses, and find higher probability trading opportunities.
