The term ‘Fibonacci Retracement’ might sound alien to a number of people… maybe even complex, but it really isn’t as complex as it sounds. Fibonacci retracement is a familiar tool for both FX and digital currency traders – it helps to predict the potential support or resistance levels for market price-points.
The term Fibonacci was inspired by Leonardo of Pisa, an 11th century Mathematician who introduced a unique sequence of numbers known as the ‘Fibonacci Sequence.’
The Fibonacci Sequence
The Fibonacci sequence goes thus – 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584… the sequence continues in this pattern to infinity…
If you observe the above sequence closely, you will realize that the number sequence is derived from the sum of the immediate two preceding numbers.
You will also notice that when you multiply a number by approximately 1.618, it will give you the number just after it – for example, 5×1.618 equals 8.09 which can be rounded up to the nearest whole number to give you 8, see? It will interest you to know that this gives rise to a value widely known as ‘phi’ or ‘golden ratio’ and this seems to have a relationship with everything that makes up nature.
Take your fingers for example – from the tip of the base to the wrist, it is usually larger than the preceding one by the figure of the golden ratio (1.618). There are many more examples of the Fibonacci sequence in life, from the positioning of flower petals to the formation of shell spirals.
Other ratio figures worthy of note are 0.382 – representing any number in the sequence divided by the number two places to its right. 0.236 – representing a number in the sequence which is divided by the third number to its right.
When you become a regular trader, you will upon careful and close observation see that prices react to these levels on a regular basis – this can help guide your entry and exit points.
Using Fibonacci to Find Support Levels
To make use of Fibonacci in finding support levels, the trader must first identify a ‘swing high’ and ‘swing low.’
A swing high refers to a candle stick on a trade chart that has a lower high directly to both its left and right found at the peak of a trend. On the other hand, a swing low is the candle stick on a crypto trading chart with higher lows on both its sides.
Once the above points have been figured out, you select the Fibonacci retracement tool on your trading platform and then connect the swing low with the swing high. The action will see the automatic generation of potential support levels known as retracements.
The vertical distance between trough and peak divided by ratios in the Fibonacci sequence helps with deriving each retracement.
Using Fibonacci to Find Resistance Levels
The mechanism in using Fibonacci to find resistance levels is pretty much similar to that of support levels. The difference though is that the ‘swing high’ will be connecting with the ‘swing low’ this time around.
As with the support, the points of resistance will be shown by dividing distance from peak to trough using the ratios in the Fibonacci sequence.
In conclusion, it is important to note that even though the Fibonacci tool is important in projecting support and resistance levels, this is not guaranteed. It is advisable to make use of the Fibonacci in conjunction with other indicators such as the ‘Moving Averages (MA)’ or the ‘Relative Strength index (RSI).’
This being said, more personal education and research is advised as every trader overtime develops the best trading strategy that fits them personally.