What is the Fibonacci Retracement? Crypto Beginner’s Guide
While recognizing the need for strategic theoretical tools required for successful trading, most traders don’t really want to burden themselves with what some may consider as “unnecessary theorizing”, and want to have more practical and applicable trading knowledge tools at their disposal.
Understanding what Fibonacci Retracement method is and how it works is far from some “useless theorizing”, though. In fact, it is a viable and largely overlooked trading knowledge tool that is often required for accurate assessments of price behavior, as well as for correct estimations of entry and exit points which are most optimal for the given trader’s position on the market.
Fibonacci Retracement: Predicting Support and Resistance Levels for Various Price Actions
The Fibonacci Retracement method is particularly applicable when it comes to predicting the potential support and resistance levels for the variety of price actions that may happen. Anecdotal trading evidence suggests that very often price actions follow the Fibonacci sequence and can hence be predicted with a certain degree of accuracy well in advance before they happen.
An ability or lack thereof to do that not only has the potential to make or break the day of any aspiring trader, but can also serve as distinguishing criterion when it comes to separating newbie traders from the real pros. Making correct use of the Fibonacci Retracement method can provide you as a trader with an exclusive beforehand knowledge on what your optimal targets are on your position.
How Does a Fibonacci Retracement Work?
Despite the intimidating name, the Fibonacci Retracement method isn’t something only elite mathematicians or financial analysts are able to comprehend. With due diligence, you can grasp its essence fairly quickly and will soon be able to apply it to change your trading game forever.
The Fibonacci Sequence
Back during the 11th century A.C., the mathematician called Leonardo of Pisa (nowadays commonly known as Fibonacci) distilled a very unique sequence of numbers which follows like this:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, and etc., since the sequence of numbers repeats infinitely.
What’s truly unique in the sequence of numbers distilled by Fibonacci is not the sequence of numbers itself, but rather it’s underlying pattern. Essentially, every successive number equals the sum of the two numbers that precede it, and each successive number is approximately 1.618 times greater than the preceding number.
The ratio discovered by Fibonacci is what is also known as “phi”, or the “golden ratio”, and can find its manifestation in many things across natural and social phenomena, including price behavior.
What is a peak and what is a trough
In trading lexicon, a “peak” is essentially the point at which a given trend stops growing, while a “trough” is the point at which a given trend reaches its ultimate cyclical bottom after a period of declining activity and contraction. Describing and analyzing peak-to-trough and trough-to-peak relationships within trends in an attempt to predict future trend behaviors is a big part of the essence of trading as such.
Using the sequence discovered by Fibonacci, you can divide the distance between the peak and the trough, as well as between the trough and the peak of a given price trend, by the “golden ratio” or other ratios such as 0.382 or 0.236 within the Fibonacci sequence, and uncover the information that may be extremely valuable in your attempts as a trader at predicting or analyzing price trend behaviors.
Using Fibonacci Retracement in Combination with Resistance and Support
Using the Fibonacci Retracement method you can predict the potential levels of support or resistance to a given trend of price behavior on the market. You can do so following the following outline of steps:
- Determine the “swing high” and the “swing low”. A “swing high” is a candlestick at the peak of of a trend within any time frame that has a lower high directly to its right and left. A “swing low” is the low candlestick stick of a trend with a higher low on each side.
- To determine the potential levels of support, connect the swing low to the swing high using the available Fibonacci Retracement tool in the software that you use for trading, and the potential levels of support to the given trend of price behavior will be generated by the tool as retracements. Essentially, the software tool divides the vertical “trough to peak” distance by the ratios from the Fibonacci sequence.
- To determine the potential levels of resistance, connect the swing high to the swing low using the available Fibonacci Retracement tool in the software that you use for trading, and the potential levels of resistance to the given trend of price behavior will be generated by the tool as retracements. Essentially, the software tool divides the vertical “peak to trough” distance by the rations from the Fibonacci sequence.
Using the Fibonacci Retracement method this way you can gain amazing insights into where price behavior may lead the trend being analyzed this way.
What are the Benefits of Using a Fibonacci Retracement?
The main benefit of using the Fibonacci Retracement method is hidden in the fact that this method is largely overlooked by the vast majority of traders, despite the fact that anecdotal trading evidence suggests its extreme potency for predicting price behavior. Taking the time to learn how to apply the Fibonacci Retracement method in your trading will give you as a trader a competetive edge and provide you with insights into a kind of trading information that most traders unfamiliar with the method can only dream of.
What are the Drawbacks of Using a Fibonacci Retracement?
As any trading tool, the Fibonacci Retracement method isn’t perfect and does not guarantee that the price will behave itself exactly as this method helps you predict it might. Despite the Fibonacci Retracement method being a legitimate and viable trading tool, you must still make an effort to apply a variety of trading tools before you make any trading decisions that may influence your position on the market.
Final Thoughts on the Fibonacci Retracement
It is the knowledge of how to correctly apply viable and potent trading tools as the Fibonacci Retracement method, in harmony with all the other trading tools in the trader’s toolbox, that turn good traders into elite level traders. While other traders are discarding the Fibonacci Retracement method as too “theorized” and “complex”, you can take the time to learn it and let the method compensate you generously for your effort taken when your trading decisions become more effective and bring you more success as a trader.