Fibonacci – a popular technical tool. It has become an indispensable part for investors. In the world of cryptocurrencies, the Fibonacci is often applied to predict market trends. This article Crypto Trading will introduce the concept and how to apply it in cryptocurrency trading analysis. Let’s explore!
Fibonacci Theory and its Application to Crypto Market
Fibonaccis is a concept that many Crypto traders are interested in. These indicators help identify support and resistance levels. It is important for placing stop-loss orders or defining trading targets.
Learn what is the Fibonacci theory. Calculation formula
Fibonaccis is a technical analysis indicator based on sequences of numbers and coefficients created by mathematician Leonardo-Fibonacci.
The Fibonacci sequence is created from natural numbers starting from 0 and 1 or 1 and 1. The next numbers in the sequence are the sum of the two previous numbers: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,…
The calculation formula is as follows:
- In technical analysis, Fibonacci numbers are used to determine price levels at ratios such as 23.6%, 38.2%, 161.8%, 423.6%, and many others. These ratios are based on the Fibonacci sequence. They start at 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …
- When you take the next number and divide it by the previous number, the ratios will be close. For example: 5/3 ≃ 8/5 ≃ 13/8 ≃ 21/13 ≃ 34/21 ≃ … ≃ 1.618. When you take the next number and divide it by the two previous numbers, the ratios will also be close. For example: 5/13 ≃ 8/21 ≃ 13/34 ≃ … ≃ 0.382. The reciprocal of the golden ratio is about 0.618. When you subtract 0.382, you get about 0.236.
- Also, there are cases where the square of the golden ratio is about 2.618. The cube of the golden ratio is about 4.236.
What is the role of Fibonacci numbers in Crypto?
Traders believe that the Fibonacci sequence plays an important role in finance. This sequence is used to create the percentages that traders use. These include 23.6%; 38.2%; 50%; 61.8%; 78.6%; 100%; 161.8%; 261.8%; 423.6%.
These ratios are applied to many different techniques:
- In Fibonacci Retracements: These are horizontal lines on the chart, indicating support and resistance areas.
- In Fibonacci Extensions: These are horizontal lines on the chart. They indicate where the price wave can continue strongly.
- In Fibonacci Arcs: Considered as curved lines. It originates from highs or lows, representing support and resistance areas.
- In Fibonacci Fans: These are diagonal lines, based on highs and lows. They represent support and resistance zones.
- In Fibonacci Time Zones: These are vertical lines on the chart. They are used to predict when major price movements may occur in the future.
What are the disadvantages of the Fibonaccis indicator tool?
While this ratio can indicate potential support or resistance points, there is no guarantee that the price will react strongly to it. This is why it is often combined with other signals.
Another negative aspect of using this indicator is that there are too many resistance levels. As a result, the price often fluctuates around these levels. This creates uncertainty for traders when it comes to determining the most effective resistance level to consider in their trading strategy.
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What are the types of Fibonacci?
In Crypto technical analysis, the two main types commonly used are:
Retracement Fibonaccis trong Trade Coin
To put it simply, Fibonacci Retracement works like this:
Based on the Fibonaccis levels (point B), we can determine the reversal level of the chart. Traders need to determine the price at the top of the trend. Then find the support price based on the retracement ratios. Usually, they use 4 basic ratios for this model: 23.6%, 38.2%, 61.8%, and 78.6%.
However, using Fibonacci Retracement alone is not simple. To determine the trend more reliably, traders often combine it with other tools. For example, trendline, support and resistance. When Fibonacci levels coincide with support and resistance zones, there is a high probability that the price will reverse from there.
What is Fibonacci Expansion?
If Fibonaccis Retracement helps traders identify trends, Extension is used to mark the end point of that trend. The price pattern of the Fibonacci Extension looks like this:
While Fibonacci Retracement uses multiple ratios, Extension focuses on the most important ratio – 161.8%. It is intended to predict the level at which the price chart may “bounce back”. Using the Fibonacci Extension, traders can estimate the range that a trend will travel before changing direction.
Similar to Fibonaccis Retracement, making profit-taking decisions based on the Fibonacci Extension alone is often not accurate enough. In fact, traders often combine it with other tools. For example, support or resistance for more certainty.
Distinguish the difference between Fibonacci retracement and extension
| Fibonacci retracement | Fibonacci Extensions | |
| Paint | 2 clicks | 3 clicks |
| Measure | Retracement in an uptrend and bounce in a downtrend | How far does an uptrend or downtrend last? |
| Purpose | Identify levels of support and resistance | Determine target price to take profit |
| Fibonacci ratios | 23,6%, 38,2%, 61,8%, 78,6% | 61,8%, 100%, 161,8%, 261,8% |
How to apply Fibonacci in Crypto technical analysis
Technical traders try to use it to identify key points. It can mark reversals in asset prices. In particular, day traders can use Fibonacci retracements to assist investors who are trying to predict the price movement of a product.
Fibonacci retracements are often the most popular tool in the toolbox. This is partly due to their simplicity and partly due to their versatility in applying them to almost any type of trading instrument. They can be used to draw support lines. They can also be used to determine resistance levels, place stop-loss orders, and set price targets.
Fibonacci ratios can even become an important part of a counter-trend trading strategy. Retracements are typically horizontal lines on a chart. They indicate potential locations of support and resistance levels. Each level is associated with a specific percentage. It shows how far the price has corrected after each previous up or down move.
Detailed guide to trading with Fibonaccis retracements and extensions
Here are instructions on how to draw lines with two common types. They are retracement and extension:
How to draw Fibonaccis Retracement to determine the entry point
In trading, retracement levels play an important role in determining support and resistance levels.
This helps traders determine when a trend starts or ends within the time frame they are trading in. However, this information is often subjective. Because a trend can start from a very high price. Even from the bottom of a trading asset.
Once the tops and bottoms of the trend have been identified, traders can use the Fibonacci sequence on their charts. They start by drawing 0% and 100% lines at the extremes of the price move. Next, they add Fibonacci retracement levels at key levels. For example, 23.6%, 50%, 61.8%, 76.4%, and 78.6%.
For example, on the Crude Oil chart, the 123.68 level is the peak at point A. It marks the beginning of the downtrend. The 90.56 low at point B marks the end of this trend. We can then draw Fibonacci retracement lines from point A to B and identify the Fibonacci retracement levels in between these extreme points as illustrated in the Figure.
How to draw Fibonacci Trading Expansion to determine take profit point
The process of drawing and creating Fibonacci extensions is very similar to Fibonacci retracements. You can easily compare. However, the difference is that Fibonacci extensions require three points to draw. It is not just two like Fibonacci retracements.
Like Fibonacci retracements, the extreme trend highs and lows are identified as the first two points to draw the extension line. However, the third point cannot be identified until the market completes the initial retracement. Only then can the new trend higher or lower be identified. This corrective high or low is then used as the third point to draw the Fibonacci extension.
In the example shown in the figure, we see that both the bottom and top of the downtrend in the Figure above are still identified by points A and B. The market will then likely make a corrective move up to 101.88, which is point C, and then start to resume the original downtrend.
Now we can draw Fibonacci extensions from points A and B, then through point C. Then the Fibonacci extension levels are projected downwards. It can be used as a potential support target.
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Should Elliott waves be used in combination with Fibonacci in trading?
In Crypto market trading, people often combine the Elliott wave with Fibonacci ratios to have a more comprehensive and accurate view of trends and price fluctuations. This combination helps analysts easily identify price patterns. At the same time, they can better understand market developments.
What is the Elliott Wave?
The Elliott Wave Theory is named after American Ralph Nelson Elliott (July 28, 1871 – January 15, 1948). was an American professional accountant and author. asserted that the market moves in repeating cycles.
He believed that investor emotions are influenced by external information and crowd psychology. Mainly create these cycles. Elliott explained that price movements are shown through repeating patterns. It reflects the general sentiment of the Crypto market trend.
According to Elliott, “Elliott Wave Theory is a detailed description of the behavior of groups of people. It shows the variation of collective mood from pessimism to optimism. And vice versa, in a natural sequence that creates characteristic patterns that can be measured.”
What is the effect of the Elliott Wave combined with the Fibonacci indicator?
Often, investors will combine Elliott wave theory and Fibonacci to determine support and resistance levels for market waves. Concretize it to measure the parameters of the trend.
Elliott wave principles create structure and shape. While Fibonacci levels help measure price.
Let’s see how Elliott and Fibonacci combine :
- Wave 1: Marks the beginning of a wave sequence. The market usually starts in a bearish mood. Therefore, few people will recognize this wave initially. Wait for the main wave 1 to complete to determine the size of the main wave 2.
- Wave 2: Correction to main wave 1, not exceeding the starting point of wave 1. Usually, wave 2 corrects within the range of 0.382-0.618 of wave 1.
- Wave 3: Usually the strongest and largest wave in the price trend, equal in size to wave 1. If it is an Ending Diagonal or a Leading Diagonal pattern, wave 3 will be shorter.
- Wave 4: Is a downward price correction, often forming a long zigzag shape. Wave 4 corrects compared to wave 3 and is usually at 38.2%, 50%, 61.8%.
- Wave 5: Usually the final wave and is usually equal to or around 61.8% of the main wave 1. Usually at 38.2% or 61.8% of the sum from the bottom of wave 1 to the top of wave 3.
What are some notes when combining Elliott waves with Fibonacci?
When combining Elliott waves with Fibonacci, there are a few important notes that traders need to remember:
- Correct Wave Identification: To apply Fibonacci effectively, you need to accurately identify the Elliott waves within the trend. This requires a deep understanding of Elliott waves, Price action, and the ability to recognize wave patterns.
- Choose reliable extreme points: When drawing Fibonacci levels, choose reliable extreme points to serve as the starting and ending points of each wave. This helps to accurately identify support and resistance levels.
- Use the appropriate Fibonacci levels: Consider using the appropriate levels for each wave type. For example, the 38.2% and 50% levels typically reflect corrective waves. While the 161.8% and 261.8% levels typically reflect extended waves.
- Determine Risk and Reward: Before opening a position, determine your risk and profit target based on Fibonacci levels. This helps manage risk and optimize the risk/reward ratio.
- Combine with other indicators: Do not rely solely on Fibonacci and Elliott waves. Combine with other technical indicators such as moving averages, MACD or RSI. To have a more comprehensive and accurate view of the market.
How to trade with Elliott waves combined with Fibonacci effectively
The combination of Elliott Wave and Fibonacci helps traders identify potential support and resistance zones and set profit targets effectively. Here’s how to apply it:
- Used to identify support/resistance zones in Elliott waves. Fibonacci retracement levels play an important role in identifying support/resistance zones in Elliott wave structures. For example, in an impulse wave, the 61.8% Fibonacci level of the previous wave can act as support for the current wave. Similarly, in a correction wave, the 38.2% or 61.8% Fibonacci level of the previous impulse wave can act as resistance.
- Use Fibonacci to determine profit targets in Elliott waves. Fibonacci extension levels help predict profit targets in Elliott waves. Common levels are 161.8%, 261.8%, and 423.6%. For example, a profit target for wave 3 can be predicted using the 161.8% Fibonacci level of wave 1. Similarly, in a corrective wave, the Fibonacci extension level of the impulse wave can determine the target for the corrective wave.
Note that Fibonaccis levels are only a prediction tool. They do not guarantee that the price will exactly reach these levels.
Conclude
Above is the basic knowledge about Fibonacci – an indispensable tool if you want to succeed in the cryptocurrency market. Like other tools, Fibonacci levels will support investors in making decisions. However, the accuracy and trading results are only relative. It all depends on the experience and understanding of each trader. Please follow Crypto Trading to get more new and useful news!
Frequently Asked Questions
What is Fibonacci and why is it important in trading?
This is a technical analysis tool based on the Fibonacci sequence. It is used to predict potential support and resistance levels on a price chart. Important because it helps traders determine effective entry and exit points. As well as predict trend reversals.
How are Fibonacci numbers applied in technical analysis?
Applied in technical analysis through retracement and extension levels. Retracement levels help identify potential support and resistance points in the current trend. While extension levels help predict profit targets in future trends.
How to use Fibonacci levels to identify support and resistance points?
To use the retracement form, the trader identifies the high and low points of the price trend. Then, Fibonacci levels are drawn between these two points. The 23.6%, 38.2%, 50%, 61.8%, and 78.6% levels are commonly to identify potential support and resistance levels.
