When you think of popular cryptocurrency trading tools, the Fibonacci retracement level tool is right there at the top of the list. Helping traders reveal key levels to place buy and sell orders is a very simple way to explain the purpose of this highly effective tool and doesn’t entirely do it justice.
For those traders who properly know how to utilize its formidable ability to spot these crucial levels of support and resistance, it can and will make you into another trading success story.
For now, let’s give you a little back story as to why institutional traders have been using this tool for decades…
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A Quick History Lesson on Fibonacci
Leonardo Bonacci, nicknamed Fibonacci, was a Italian mathematician born into a humble family of traders back in 1170. Amongst being a brilliant mathematician, Leonardo was an avid traveler.
Through his travels he discovered a Hindu-Arabic numerical system and quickly figured out its advantages over the current European system at that time. This led him to become one of the most influential people to lead the adoption of the Hindu Arabic numerical system by the Western world.
Leonardo published a book called “Liber Abaci”, known as “The Book of Calculation”, which he published in the year 1202. The book included detailed examples on how to practically use these highly innovative calculations in every day uses like bookkeeping, weight and measurement conversions, human interest calculations, among many other things. The book was so well loved and received that we can feel the effects of its influence, even in today’s world.
Leonardo’s system completely overtook the previously used Roman numerical system and improved business calculation capabilities which led to an exponential growth of accounting and banking in the heart of Europe.
How Were Fibonacci Levels Discovered?
An interesting proposal within his book was based on an observation of a particular problem involving the growth of rabbits in ideal conditions. The solution to this problem was later found within a mathematical sequence of numbers which we now know as Fibonacci numbers.
Furthermore, this was not the first time these sequences of numbers were recorded. Historians had discovered documents by Indian mathematicians that were found at least 600 years before Leonardo discovered them himself.
The ratio of numbers, which we know as the Golden Ratio, was discovered by Phidias (Greek Architect) between the years of 500 BC and 432 BC and can be found in nature as well as human creations like architecture and trading systems, which we use to this day.
OK, enough of the history lesson…
Why Are Fibonacci Levels Such a Big Deal in Trading?
While the math will most likely go over most people’s heads, it’s important to note that the Fibonacci sequence is found in the geometry of nature. You can find the sequence in things like animal skin, DNA structure, spirals within a seashell, and the list goes on.
This number sequence produces a ratio of 61.8%, which mathematicians will commonly refer to as the “Golden Mean”, which is a Greek term that is defined as a common ground between two extremes. However, we refer to it as the “Golden Ratio”, which can be found in many aspects of nature.
This golden ratio is often found within human responses as well. When asked to choose between two value neutral options, study after study has shown that the ratio is typically split between 62% and 38%, not 50-50. The 62% is labeled as the “Golden Ratio” which is found within our financial markets as well.
Most financial markets will reveal this Golden Ratio on both time and price periods in which a retracement of 61.8% is typically found after a 100% advancement.
So to sum it all up…
Fibonacci retracement levels refer to these simple areas of support and resistance that are typically found in human behavior, over decade’s worth of financial studies.
What Exactly Do These Levels Mean?
The Fibonacci levels that are used within institutional trading are 23.6%, 38.2%, 50%, 61.8%, and 100%. However, the Fibonacci levels more commonly used in cryptocurrency trading is 38.2%, 50%, 61.8%, and 100%.
The 50% level is not a Fibonacci level per say, but stems from Dow Theory’s assertion that averages often retrace half of their prior movement. Nonetheless, these are levels that you’ll find the most support and resistance around.
But, why are these levels important?
They’re psychological barriers that tend to repeatedly show up within the financial markets, time and time again. They are called inflection points where traders tend to anticipate a bounce or break off a resistance or support.
Another interesting aspect to Fibonacci levels are, the fact that the more people that use them, the more accurate they become. This tends to fall under the “self-fulfilling prophecy” paradigm.
The most important Fibonacci level, as you might’ve guessed, is the 0.618, Golden Mean level. This is a critical level where sellers tend to give up bargain-hunting and a potential mass buying frenzy will ensue.
These are great places to either buy upon a breakout or pull back to after an uptrend. Careful traders won’t make a move until the price is 5 to 10% above this Fibonacci level in order to confirm their speculation. This is a safe move since Fibonacci levels are not always precise.
How Do I Use This “Almost” Magical Tool?
The Fibonacci retracement levels are made up of horizontal lines which are used to highlight areas of expected support and resistance within crucial Fibonacci ratios. In order to create these levels, you’ll need to draw a trend line between the lowest and highest price of a particular trading cycle.
It’s up to a trader’s discretion to use wicks or candles when measuring the lowest and highest points. Whichever one you decide to stick with, make sure you stay consistent between charts.
This is a very popular tool among technical traders as it identifies places where they can strategically place price targets and stop losses. You’ll find more times than not that the market tends to either struggle near these Fib resistance levels or breakthrough and utilize the old resistance level as a new support .
Call it magic, or simply just some form of a self-fulfilling prophecy, but for some unknown reason, markets tend to move significantly towards these support and resistance levels.
One important thing you should note…
Fibonacci levels are not completely accurate. Use your common sense along with other indicators and trading patterns in order to solidify a game-winning trading strategy. Just because you buy at the 0.236 level doesn’t mean that the price is going to go up with 100% certainty. However, if you take these levels into consideration, you’ll have a much higher probability of winning trades.
Can Fibonacci Retracement Levels Be Used With Other Trading Tools?
Absolutely! In fact, it’s highly recommended that you utilize other trading tools and indicators alongside the Fibonacci retracement tool. If you find that other tools and indicators tend to overlap with the results of the Fibonacci retracement levels, this generally means that there is a fortified support and resistance to be expected.
This helps you better solidify your trading strategy.
What’s a Good Beginners Strategy to Use with Fibonacci Levels?
Fibonacci levels are very efficient at predicting a bounce off a big red candle, upon completion of a quick rally. These quick trades can generate a 20-40% profit if timed properly. This takes into consideration that once a rally has been quickly dumped, it will typically bounce back at a Fibonacci level near or around 0.618 or 0.786, before continuing to reach new lows.
Many traders, including myself, will use the Fibonacci retracement levels to decide where to buy into the next trading cycle. Remember that these levels are merely points of interest. Prices will not always reach one level or another but more often times than not, stay around the same ballpark area.
It’s also worth noting, that high volume markets are more likely to show retracement levels than low volume. Larger volume cryptocurrencies like Bitcoin, Ethereum, Litecoin, in any other cryptocurrency in the top 10 are more likely to show retracement levels than minor tokens.
Start practicing with the Fibonacci retracement tool today. Learn how to utilize it properly in order to maximize your trading success.
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