What is Fibonacci? In the field of cryptocurrencies, the Fibonacci sequence is used by many traders to predict market trends. Here, Crypto Trading will provide information to readers to learn about popular Fibonacci types in the Crypto world and how to exploit them effectively in the article below. Follow along!
Learn What is Fibonacci and What It Means in Crypto
Understanding the concept is an important first step that every trader needs to grasp before entering Crypto trading.
The concept of What is Fibonacci?
The Sequence Fibonacci numbers is an infinitely long series of numbers in which each number is created by adding the two numbers before it. The sequence starts with the first two numbers 0 and 1. The next numbers in the sequence are calculated by adding the two numbers before it. So the Fibonacci sequence starts like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and continues forever.
The mathematical formula used to calculate the Fibonacci sequence is:
F(n)=F(n−1)+F(n−2), with F(0)=0 and F(1)=1
The Fibonacci sequence is widely used in many different fields. For example, mathematics, computer science, and astronomy. A special feature of this sequence is that the ratio between two consecutive numbers in the sequence approaches a value of about 1.618. This is called the “golden ratio”. It contains many interesting mathematical and geometric properties. It serves as the basis for many studies and applications in science and art.
The Meaning of the Fibonacci Sequence in Crypto Trading
It is very important in analyzing and predicting price movements in the cryptocurrency market. The Fibonacci effect is used to identify important levels in the price movement cycle. Especially through the Fibonacci Retracement tool.
Specific applications:
- Identify resistance and support levels: Helps predict price reversal points.
- Determine stop-loss: Helps manage risk effectively.
- Determine target price: Set a price target to take profit.
It is popular due to its simplicity and flexible application. It helps traders make accurate decisions. At the same time, it can optimize profits in the volatile environment of the Crypto market.
Summary of Fibonacci types in coin trading
In Crypto technical analysis, there are three main types that traders commonly use as follows:
- Fibonacci Retracement: This is a tool that measures stock price corrections. Based on levels (23.6%, 38.2%, 50%, 61.8%, 100%). This tool helps identify support and resistance levels when prices correct before continuing the main trend. Traders use these levels to set buy (support) or sell (resistance) points.
- Fibonacci Fans: It is used to measure and predict price trends. This tool draws lines from the highs or lows of a major trend based on levels. These lines help identify potential support and resistance levels in a price trend.
- Fibonacci Arc: Uses three curved lines drawn from the top or bottom of a trend. Corresponding to levels (38.2%, 50%, 61.8%). This tool helps measure corrections and predict potential price levels. It provides important support and resistance levels during price corrections.
See more: Fibonacci: magic trading tool for every trader
Purpose and usage of 2 popular Fibonacci types
Here are detailed instructions on how to use the two most popular types today:
Trading Fibonacci retracement
It is the most widely used Fibonacci trading tool.
Purpose of using Fibonacci Retracement
Some people also call it Fibonacci retracement. It is applied to identify potential support points during a market decline from top to bottom.
Conversely, when the market rallies from bottom to top, it provides potential resistance points. It levels include: 0.236, 0.382, 0.618, 0.764.
How to use it?
When the market is clearly moving, applying it will increase the effectiveness of your trading strategy. To identify Fibonacci retracements in an uptrend, you can follow these steps:
- Identify the highest point during your trading period.
- Determine the lowest points from the highest point determined in the previous step.
- Use by drawing from the top down to each bottom in the series of bottoms.
For example, let’s say you want to find a way to profit from a particular trading opportunity:
- The high was 89.83 and the low was 71.31. This is the starting point of an uptrend signal.
- Draw it from top to bottom and you will have 5 support levels: 0.236, 0.382, 0.5, 0.618, 0.764.
- You would expect the price to find support at these levels as it declines from the top. Typically, many traders will place buy orders when the price retraces to these levels.
When you look at the strength of the Fibonacci levels:
- The 0.236 level is considered weak, the price usually moves through it without any resistance.
- 0.382 is usually a support level, the price may retest at 0.236 before continuing to fall to 0.382.
- The strongest level is 0.5. When the price reverses at this level, it can be a good opportunity to place buy orders in the area around 0.5 for each correction in price.
Fibonacci extension
So for the extended form, The use of What is Fibonacci? Follow the next information to understand more deeply:
Uses
This is a form of it that helps you determine the target that the price can reach. When the price touches the Fibonacci extension areas. You can think about the next price target. This is actually a method to help you take profits.
Fibonacci extensions provide the answer to this question. To use this type, you need to identify 3 points: the top, the bottom, and the retracement point. Commonly used levels include 0, 0.382, 0.618, 1, 1.382, and 1.618.
How to apply Fibonacci in coin trading
Fibonacci extensions are calculated from previous price movements. The 1.272 and 1.618 ratios are also used to determine support levels. Similarly, the top-to-bottom extensions are determined using the 1.272 and 1.618 ratios to determine resistance levels.
Typically, the third price target could be at 2.618 if you have correctly identified the previous two highs and lows.
For example, let’s say you know the two Fibonacci extension levels of 1.272 and 1.618 from April 21 to the April 27 bottom. When the price starts to rise again on April 27, knowing where these two levels are is very important for a trade. Because this resistance level can cause a sharp decline.
Therefore, in the above example, identifying at least two peaks is extremely important to apply the Fibonacci extension levels.
See more: MEXC: Open a MEXC account, invest effectively
The Disadvantages of What is Fibonacci?
Although it is a popular and effective tool in technical analysis. However, there are also some disadvantages when applied to Crypto trading:
- Does not reflect the specific volatility of the Crypto market: The Crypto market is often highly volatile and can be erratic. Therefore, applying fixed methods may not fully reflect this volatility.
- Fake Signals: In some cases, though there is a correlation. However, the price can break through these levels without a corresponding reaction from the market.
- Cannot Reverse Trends Accurately: It is often used to identify support and resistance levels in a pre-determined trend. However, it cannot predict or oppose trend reversals accurately.
- Readability: Identifying high and low points to apply can be difficult in a Crypto market environment that is often highly volatile
The things to keep in mind when using it?
When using it, remember that it is not a one-stop tool that can guarantee 100% accurate analysis. To get the most out of it, you need to combine it with other analysis tools. Here are some points to keep in mind when applying it:
- Use with other tools: It works well when combined with other tools. For example, moving averages, trendlines, and momentum indicators. Combining them gives you a complete picture of price trends.
- Assessing Flexibility: Consider Fibonacci levels in the context of the main trend and other support/resistance levels on the chart to assess their validity. Sometimes levels are not completely accurate but still provide useful information about potential buy and sell points.
- Identify the risks: Always be aware of the risks when trading based on them and use stop-loss to protect your investment capital. It requires traders to have knowledge and experience to use it effectively. Invest time to understand how to use it before applying it in practice.
Conclude
Learn more about What is Fibonacci and the tools to explore how to combine its benefits with other technical analysis theories. Crypto Trading hopes that people will find creative ways to use it to enhance their trading toolkit. If you enjoyed this article, please bookmark and follow our website for more useful content!
Frequently Asked Questions
What is Fibonacci and why is it important in trading?
It is a natural sequence of ratios used in technical analysis to determine support and resistance levels in financial markets. It is important because it can help traders identify potential buy and sell points.
What are Fibonacci the key levels?
The major levels include 0.236, 0.382, 0.500, 0.618, and 0.786. Additionally, other percentage levels such as 0.50 and 0.786 are also commonly used in Fibonacci analysis.
How to apply to trading charts What is Fibonacci?
To apply it, you need to identify a peak and a trough in a particular trend on the chart. Then, you drag the Fibonacci tool from the peak to the trough (or vice versa) and it levels will appear on the chart.
