In the volatile and complex world of cryptocurrency trading, traders are always looking for effective technical analysis methods to optimize their trading strategies. One of the widely used and long-lasting tools in predicting price trends is the Sequence Fibonacci numbers. In this article, let’s explore more deeply Crypto Trading and how this sequence is applied in the cryptocurrency market.
Learn about the Sequence Fibonacci numbers tool in the cryptocurrency market
What is the Fibonacci sequence? The sequence Fibonacci numbers start with 0 and 1, and each subsequent number is the sum of the previous two: 0; 1; 1; 2; 3; 5; 8; 13; 21. And so on ad infinitum. From this sequence, we can determine important ratios used in technical analysis, including 23.6%, 38.2%, 50%, 61.8%, and 100%. Traders often use these ratios to identify retracement and extension levels on price charts.
The 61.8% ratio – the golden ratio. It is especially important and serves as the basis for many applications of Fibonacci in technical analysis. This ratio appears when dividing a Fibonacci number by the next number after it in the sequence, for example, 21/34 ≈ 0.618.
What is the Fibonacci retracement level?
In Fibonacci retracement, key levels come from ratios derived from the Fibonacci sequence. The most commonly used levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
Traders draw these levels on a price chart to indicate areas where an asset’s price may find support (if moving down) or resistance (if moving up) before resuming the previous trend.
What is the Fibonacci extension?
By default, it has levels of 61.8%, 100.0%, and 161.8%. They are built from a segment of the first part of the trend, delayed from the time the first retracement is completed. Fibonacci extensions also add a new level of 50% because it is usually taken into account by price.
See more: Fibonacci: magic trading tool for every trader
How to use Sequence Fibonacci numbers?
The Sequence Fibonacci numbers are a powerful technical analysis tool that helps identify support and resistance levels in price trends. To effectively use this sequence in trading, especially in the cryptocurrency market, you can refer to the information below:
Where do Fibonacci retracement levels come from?
Fibonacci retracement percentages are created from the Sequence Fibonacci numbers. Leonardo de Pisa discovered and shared this sequence of numbers in his book, Liber Abaci (The Book of Numbers), published in 1202.
Example 1: Take 21 divided by 34, we get 0.6176. Notice that the ratio of two adjacent numbers gets closer to 0.618 as the sequence goes to the right. The ratio of 0.618 translates to a percentage of 61.8%, which is one of the important levels.
We can reapply this method by dividing by every other number in the sequence.
For the next example, take 21 divided by 55, which gives us 0.3818. The ratio of each two numbers in the sequence will tend towards 0.382, or 38.2%, the second most important level.
sequence-fibonacci-numbers-
If we apply this method a third time, dividing by every third number in the Sequence Fibonacci numbers we find that 21 divided by 89 equals 0.2360. As the sequence moves to the right, the ratio moves toward 0.236, or 23.6%. This is the third Fibonacci retracement number.
The fourth and final level is 78.6%, or 0.786 — the square root of 0.618.
Calculating retracement ratios using Sequence Fibonacci numbers
To apply the tool correctly, we first need a complete trend. The Fibonacci retracement tool will measure the length of the trend, and then divide it into 4 main levels.
The four ratios of 23.6%, 38.2%, 61.8%, and 78.6% are applied to the size of the trend of $100.
This first retracement at 23.6% would correct $23.60 from the high ($100 x 23.6% uptrend = $23.60). $350 minus $23.60 = $326.40.
The second retracement at 38.2% would correct to $38.20 from the $350 high ($100 x 38.2% = $38.20 uptrend).
The calculation is similar for the third and fourth levels, using 61.8% and 78.6% as multipliers.
After doing these calculations, we have four price zones where the downtrend correction could stop and reverse back to the uptrend. In the example above, the price temporarily stopped at the 38.2% level before falling further to the 61.8% level. The price eventually stabilized and rose back to the 38.2% zone.
How are Fibonacci retracements drawn?
Drawing Fibonacci retracement levels is fully automated using the built-in tool on TradingView. All you have to do is enter the parameters and customize the display levels to 23.6%, 38.2%, 61.8%, and 78.6%.
At this point, Fibonacci retracement levels will appear on the chart. Traders will focus on these levels to identify reversal points in the next correction.
How are the Fibonacci Sequence numbers applied in Crypto Trading?
Here are the main applications of Sequence Fibonacci numbers in Crypto Trading:
- Fibonacci retracement
- Fibonacci Extension
- Fibonacci Arcs and Fans
- Fibonacci Time Zones
Sequence Fibonacci numbers used in trading strategies
Traders often use Fibonacci retracement levels as part of a trend trading strategy. Traders using this strategy predict that the price will likely bounce from the Fibonacci levels back in the direction of the original trend.
On the EUR/USD chart below, we can see that a major downtrend started in May 2014 (point A). The price then bottomed in June (point B) and retraced to approximately the 38.2% fib retracement level of the down move (point C).
In this case, the 38.2% level would be the perfect place to enter a short position, aiming to take advantage of the continuation of the downtrend that started in May.
Identify Support and Resistance Levels in Crypto Using Fibonacci Retracement
Find support levels
- A spinning top is simply a candle at the top of a trend in any time frame that has lower highs to the immediate right and left of it. Conversely, a swing bottom is the low candle of a trend that has higher lows on each side.
- Each retracement level is taken from the vertical distance “from bottom to top” divided by the ratios in the Sequence Fibonacci numbers
- The retracement levels 0.236, 0.382, 0.5, 0.618, and 0.786 are all considered support.
- Connecting the swing high with the swing low, the retracement levels will appear again by dividing the distance from the peak to the bottom by the ratios in the Fibonacci sequence.
- By connecting the swing high of 0.00006335/BTC with the swing low of 0.00002139. Analysts have calculated the predicted resistance levels for Stellar Lumens (XLM/BTC)
- The 0.786, 0.618, 0.5 and 0.382 retracement levels all provide resistance.
Which technical analysis tool is effective when combining Fibonacci?
RSI and Fibonacci sequence
- When the price shows signs of reversal, confirming both the retracement and the divergence, the trader can enter the order using a market order.
- Place a stop above or below the entry candle, depending on the direction of the trade.
- A good place to consider taking profits is at the high or low of the retracement level you have outlined.
There is a hidden divergence (left trendline) indicating a possible bullish momentum.
Fibonacci and chart patterns
- Break the upper trend line, then wait for a pullback before entering
- Place stops above or below the opposing trendline of the pattern.
- You can take profit at the extreme points of the retracement tool.
This setup also has additional confirmation with a double bottom before the wedge pattern breaks out, resulting in a high-probability trade.
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summary
In a volatile and ever-changing cryptocurrency market, it is extremely important to apply the right technical analysis tools. The Sequence Fibonacci numbers – with their strong support in predicting price trends, will continue to be one of the useful tools for traders. Follow Crypto Trading to update detailed information on how to trade in the most effective way possible for traders!
FAQs
What is Fibonacci retracement and how to use it in crypto trading?
Fibonacci retracement is a tool that helps identify support and resistance levels when prices correct within a major trend. To use it:
- Identify the main trend.
- Pick the top and bottom of the trend.
- Fibonacci plot on the price chart.
- Use the 23.6%, 38.2%, 50%, and 61.8% levels to determine entry and exit points.
How do Fibonacci extensions work in predicting price targets?
Fibonacci extensions are used to determine price targets in an uptrend or downtrend. Choose three important points:
- Starting point
- First top/bottom
- Adjusted endpoint
Traders can draw Fibonacci extensions and use the levels:
- 161.8%
- 261.8%
- 423.6%
What is the difference between Fibonacci arcs and Fibonacci fans?
Both provide different views on price trends. However:
- Fibonacci arcs draw arcs on the chart. They identify support and resistance levels based on the distance between the top and bottom of the trend.
- Fibonacci fans draw diagonal lines from the lowest or highest point. They define support and resistance levels at different angles.
