What is the Fibonacci sequence? Why is the Fibonacci sequence a popular coin trading indicator for many traders? Let’s learn about the uses and how to use the Fibonacci indicator with Crypto Trading in the following article.
Learn about the Fibonacci sequence in crypto trading.
If you don’t know What is the Fibonacci number sequence, it is a series of ratios discovered by Leonardo Fibonacci. Fibonacci was a 13th-century Italian mathematician. The Fibonacci Sequence consists of a series of numbers where each number is the sum of the two preceding numbers, starting from 0 and 1.
What is the Fibonacci sequence?
The most interesting aspect of the Fibonacci sequence is the golden ratio of 1.618. This ratio is present everywhere, including man-made and natural structures like the Taj Mahal, tornadoes spiral galaxies, etc. The golden ratio and its complementary ratios also have a significant impact on the financial markets.
So what are the classifications of What is the Fibonacci sequence ?
In the investment field, there are many types of Fibonacci tools, such as Fibonacci retracement and extension, Fibonacci fans, and Fibonacci arcs. However, Fibonacci is mostly used by traders to refer to Fibonacci retracements.
Fibonacci retracement levels are percentages derived from the golden ratio. The most widely used retracement levels are 38.2%, 50%, and 61.8%. These levels represent potential support and resistance areas where crypto prices may rebound or reverse in a trend. Additional retracement levels, such as 23.6% and 78.6% are also used but are not as common.
Crypto traders can use Fibonacci levels to identify areas where prices may reverse or stall. Fibonacci levels help traders make informed decisions about when to enter and exit trades. Retracement levels can be applied to any time frame. It is a versatile tool for many different trading styles. It is suitable for day trading, swing trading, and position trading.
Pros and cons of What is the Fibonacci sequence in crypto trading?
Advantages and disadvantages of What is the Fibonacci sequence? What characteristics should traders pay attention to about Fibonacci?
Advantage:
- Provides trading opportunities for both day traders and trend traders in trending markets.
- Fibonacci retracements are very easy to use, even for inexperienced users.
- This strategy is largely based on human psychology.
Defect:
- Fibonacci levels should not be used in isolation. The price of a cryptocurrency pair may enter a Fibonacci zone. It may break the resistance level and fail to reverse or correct.
- Determining the exact starting point of a trend can be difficult, especially on longer timeframe charts.
- Not optimal when the market is sideways.
See more: Fibonacci: magic trading tool for every trader
The use of Fibonacci retracement in crypto trading?
What is the Fibonacci sequence and when should traders use Fibonacci?
.What is the Fibonacci sequence? Role in identifying support and resistance levels
The main use of What is the Fibonacci sequence? is to identify key support and resistance levels. These levels are the basis of hundreds of trading strategies, from simple to complex. They can provide useful information about the psychology and sentiment of traders towards a particular cryptocurrency. Support and resistance levels are built on the idea that no market trend is 100% linear. This means that there will always be times when buyers/sellers start to lose faith in the trend and start buying or selling based on their emotions.
Fibonacci retracements provide information about ideal entry and exit points. The most important Fibonacci retracement level is the 0.618 ratio. This is considered the “golden ratio” in both mathematics and trading. This ratio indicates that this is the last resistance level for sellers in an uptrend. Here, sellers are overwhelmed by buyers, and the uptrend resumes. The same principle applies to downtrends.
Identify buy and sell points in trading
When using Fibonacci retracements on a trending crypto price chart, a trader will get at least 3 (or more) potential support and resistance levels. In the following example, let’s say the BTC price has just spiked to $20,000 and a trader is looking to enter a short Bitcoin position.
Bitcoin price retraces and tests the first Fibonacci resistance level (usually 38.2). This can provide a trading opportunity to short the downtrend. If BTC price action touches this level multiple times but fails to break above it, traders can interpret this as a reliable entry signal and sell at this level.
If the market breaks the 0.383% Fibonacci level, the next potential reversal zone would be the 61.8% retracement level. In the example above, the $13,300 area is the 0.618 level from the $20,000 high. We can see that the price stopped at the Fibonacci level and turned sharply.
What coin trading indicators should be combined with What is the Fibonacci sequence?
To increase trading efficiency, you should not use any tool independently. So what coin trading indicators should you combine with What is the Fibonacci sequence?
- MACD (Moving Average Convergence Divergence): A momentum indicator like the MACD is a popular way to identify signal convergence when trading Fibonacci retracements. The MACD and Fibonacci retracements are a powerful pair of tools as they can be used to identify Fibonacci support levels (via bullish divergence).
- RSI (Relative Strength Index): Also a momentum indicator, RSI is useful in identifying potential trend reversals. This can prevent traders from buying on false retracements.
- Bollinger Bands: Bollinger Bands are a popular momentum trading indicator built around the RSI indicator. When the tops or bottoms of the Bollinger Bands coincide with the Fibonacci levels of the larger structure, it can provide additional confidence in predicting a change in price direction.
See more: MEXC: Open a MEXC account, invest effectively
Secrets to Using What is the Fibonacci sequence in crypto trading?
The secret to using What is the Fibonacci sequence is the most important information in the article. Follow the instructions below to master how to use this tool.
Open the crypto chart and select a currency pair to trade
Technical analysis is usually done on the price chart of the asset being evaluated. Traders will need some form of charting software to plot Fibonacci sequences according to price movements. There are many reputable cryptocurrency charting platforms with customizable indicators. Major exchanges Binance and ByBit will have built-in charting features. Another option is to use a dedicated app such as TradingView. This is one of the best free platforms for traders. You just need to create an account with your email and set a password to get started.
Dedicated platforms like TradingView support thousands of crypto pairs. For example, if you want to use the Fibonacci sequence to trade Bitcoin, a US trader can choose a pair like BTC/USD or BTC/UST. Remember to keep the price chart consistent with your local fiat currency. TradingView also offers different pricing options for the same pair. For example, BTC/USD is based on the spot price of Binance or Kraken. Traders should choose trading pairs using prices from the exchange of their choice.
Proceed to search for support resistance levels
Find the key support and resistance levels on the crypto price chart and use TradingView’s trendlines tool to draw a solid line between the two points. This can help visualize where to place the Fibonacci retracement level in the next step. The bottom of the trendline will be the bottom Fibonacci line and vice versa.
How to draw retracement of What is the Fibonacci sequence?
Open the Fibonacci retracement overlay. The overlay is located just below the trendlines drawing tool and looks like four horizontal lines. Once you have selected the overlay, click from the swing high (or low) and draw to the opposite swing level. Use the “magnet” tool to draw the overlay from the extreme points of the candle body or candle tail. Open the indicator settings to choose which Fibonacci levels to display. The most common Fibonacci settings for crypto are 0.382, 0.5, and 0.618.
Using Fibonacci retracements to identify potential trend reversal points
The lines of the Fibonacci retracement overlay are different mathematical ratios that correspond to the Fibonacci sequence. This means that traders can view each ratio line as a mini support/resistance area. The simplest rule to apply is that when price action enters a new area rather than just bouncing off a Fibonacci support or resistance level, it should be considered a potential signal. Based on the chart above, it is likely that the price will react at this level and reverse at the 0.616 Fibonacci level.
Identify potential retracement points by combining them with other coin trading indicators
When a cryptocurrency’s price data enters a new Fibonacci zone, it is important to double-check the trend reversal using other forms of technical analysis. There are many trading indicators that can be used effectively in conjunction with Fibonacci retracements. For example, traders can add the RSI and Bollinger Bands to look for oversold conditions in a downtrend.
Make trading decisions based on Fibonacci retracement levels
If price enters a new Fibonacci zone and other indicators confirm a potential trend change, a simple trading strategy can be created. Traders can buy at the Fibonacci support level of the relevant zone. Then they set their take profit at the resistance level in the same zone. Adding a stop-loss at the next support level can also help reduce risk. It also completes a comprehensive trading strategy.
summary
The article has fully introduced What is the Fibonacci sequence. In short, this is a good tool to identify support and resistance levels and determine potential buy/sell points. However, you should not use the Fibonacci sequence alone. To increase the accuracy of technical analysis, it is necessary to combine many different tools. Follow the Crypto Trading blog to learn how to combine tools and invest effectively.
FAQs
What is the Fibonacci sequence best level for crypto trading?
Fibonacci levels are predetermined ratios based on the Fibonacci sequence. Traders need to be careful about which ratios they want to use to optimize their trading. However, in the crypto market, you can only use a few key levels (38.2%, 50%, 61.8%, and 100%). This is due to the highly volatile nature of the market.
In crypto trading, what is the best time frame to use Retracement What is the Fibonacci sequence?
Fibonacci retracements can work on any time frame. You can use it in a super short (5 minutes) or long (3 months) time frame. However, Fibonacci retracement support resistance levels are more reliable when following long-term trends.
Which Fibonacci ratios are most used in crypto investing?
Key ratios like 38.2%, 50%, and 61.8% provide valuable information about potential retracement zones. Hence they are quite commonly used in crypto trading.
