The Fibonacci number sequence is no longer strange to trading investors. However, not everyone knows the meaning and how to use Fibonacci. The article below, Crypto Trading will tell you what Fibonacci Trading is. How is it used? Let’s refer to the article below.
Some issues related to Fibonacci Trading
The Fibonacci sequence is a technical analysis indicator used for trading at reputable Crypto exchanges. Please refer to some outstanding information below.
What is the Fibonacci sequence?
The Fibonacci sequence is an indicator in technical analysis that originates from a mathematical theory by Leonardo Fibonacci. According to this theory, Fibonacci is a series of numbers starting with 0 and 1. The following numbers are the sum of the two preceding numbers, such as: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610…
From this series of numbers, people divide the numbers in the series among themselves and discover the ratios: 161.8%, 23.6%, 38.2%, 61.8%. These ratios happen to be known to many people who think they are prominent levels in trading.
Fibonacci formula is performed as follows:
- F(0) = 0
- F(1) = 1
- F(n) = F(n-1) + F(n-2)
For example:
- F(2) = F(1) + F(0) = 1 + 0 = 1
- F(3) = F(2) + F(1) = 1 + 1 = 2
- F(4) = F(3) + F(2) = 2 + 1 = 3
- F(5) = F(4) + F(3) = 3 + 2 = 5
What is Fibonacci Trading?
Fibonacci Trading is also known as Fibonacci analysis. This is a method of using the Fibonacci number sequence in technical analysis. Aims to identify potential support and resistance levels on the price chart of a financial asset.
Meaning of the Fibonacci number sequence
Like other indicators, Fibonacci Trading also has several meanings. Specifically:
- Identify support and resistance points: Using the Fibonacci sequence helps determine price areas where support and resistance may appear. Traders often find buy points near support and place sell orders. Then, take profits when the price is near the resistance levels.
- Create a confident mentality when making trading decisions: Fibonacci provides a specific system to identify important price zones. This, helps traders make the right technical analysis decisions.
- Supports risk management: Fibonacci Trading numbers are used to set stop loss orders and determine risk ratio. This process helps manage risk and preserve investment capital.
- Effective entry and exit point analysis: Provides many potential points to enter and exit the market. Investors and traders often use them to locate potential buy and sell points.
See more: Fibonacci: magic trading tool for every trader
Fibonacci Trading classification is popular today
Currently, Fibonacci Trading is divided into 3 popular types. Below, are details about the 3 types of Fibonacci number sequences.
Fibonacci Retracement Sequence
Fibonacci retracement in an uptrend does not mean the price always goes up but will be adjusted down. At this point, Retracement Fibonacci will help identify support levels. This is considered the place where the price will end its downward correction and reverse upward. This will be similar to a downtrend.
Key Fibonacci retracement levels include:
- 0.00: Starting price
- 23.6%: 1st retracement level
- 38.2%: 2nd retracement level (considered a strong support/resistance zone)
- 50.0%: Middle retracement level
- 61.8%: 3rd retracement level (considered a very strong support/resistance zone)
- 78.6%: 4th retracement level
Fibonacci Fan number sequence (Fibonacci Fan)
The Fibonacci Fan Sequence is a technical analysis tool used to identify potential support and resistance levels. Built on the Fibonacci sequence, a series of natural numbers starting from 0 and 1. Each subsequent number is equal to the sum of the previous two numbers.
How Fibonacci works:
- The Fibonacci Fan series is drawn using three trend lines created from key Fibonacci retracement levels. The most common Fibonacci retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
- Uptrend line: Starts at the bottom of the uptrend and goes through the 38.2%, 50%, and 61.8% Fibonacci retracement levels.
- Horizontal trendline: Starts at the top of the uptrend and goes through the 50% Fibonacci retracement level.
- Downtrend line: Calculated from the top of the uptrend and goes through the Fibonacci Trading retracement levels of 23.6%, 50% and 78.6%.
Fibonacci Time Zones
The Fibonacci time zone is a technical analysis tool used in trading. Aim to identify potential time zones where price movements may level off or reverse based on the Fibonacci Trading sequence.
The Fibonacci sequence, as mentioned before, is a series of numbers in which each number is the sum of the two preceding numbers (0, 1, 1, 2, 3, 5, 8…). In the FTZ, specific ratios derived from this series are applied to the time axis of the price chart. Aims to predict potential time zones for price movements.
Key Fibonacci time zone levels:
- 0.00: Start time (current time)
- 23.6%: first time zone
- 38.2% : 2nd time zone
- 50.0%: Middle time zone
- 61.8% : 3rd time zone
- 78.6% : 4th time zone
How to apply Fibonacci Trading in Coin Investment
To use Fibonacci Trading effectively, you can use the application in the following way:
Step 1: Determine the current price trend situation. There are many tools to help determine current price trends such as Trendline, MA, candlestick patterns…
Step 2: Draw Fibonacci retracement to determine the entry point
Step 3: Enter orders at 0.382, 0.5, and 0.618 which are potential retracement levels and points where traders should enter orders. However, you should only trade the trend, which means you should only enter buy orders. When you see an uptrend and a downtrend, you should place a sell order. At the same time, limiting pending orders will only be an effective option for traders with Fibonacci retracements.
Step 4: At the top of the downtrend or the bottom of the uptrend, use the Stop Loss order.
Step 5: Apply Fibonacci Trading extension to Take Profit. In a situation where the price corrects, it reduces the level to 0.618 and then reverses. If an investor places a Buy Limit order here, it will likely bring high profits.
See more: Opening an Bybit exchange account for traders
Things to keep in mind when using Fibonacci sequence trading
Fibonacci Trading is a tool that is considered capable of predicting behavior with a high success rate. Especially when applied to each specific price level. However, there is some opinion that calculating multiple retracements can be time-consuming and difficult to use.
This method has complications in reading the results, leading to difficulty for many traders to understand. Therefore, one should not completely rely on Fibonacci levels as support and resistance levels.
Fibonacci Trading was created by humans to reduce uncertainty. Therefore, they should not be used as the sole basis for making trading decisions. Traders should be sure to clearly understand market demand. Be careful not to rely too much on Fibonacci tools to avoid unnecessary risks.
Conclude
In the above article, Crypto Trading has told you some information about Fibonacci Trading . This indicator is based on mathematical ratios and does not always reflect actual market behavior. However, Fibonacci is a technical analysis tool and not a perfect price prediction method. Therefore, it should be used in combination with other indicators and technical analysis tools to get the best results… Wishing you a good investment and don’t forget to follow to update the latest investment information.
FAQS
What analysis tools should Fibonacci Trading be combined with?
For the technical trading analysis process to take place effectively. You should combine it with Trendline, RSI, MACD, and Stochastic…
Is using Fibonacci to invest reputable?
Fibonacci Trading is a technical analysis tool widely used in many fields. However, it also contains many risks, so you need to consider carefully when using it.
Does the Fibonacci indicator support risk management?
This series of numbers is used to place stop loss orders and determine risk ratio. So it can help manage risks and preserve investment capital.
