How to Use Fibonacci Retracement in Crypto Trading

In the cryptocurrency markets, trading is ruled by volatility and traders' sentiment. This makes support and resistance zones invaluable tools traders must master to take advantage of the market. However, many traders struggle with drawing accurate support and resistance zones using price action. 

Is there a better tool available for increasing accuracy? 

One such powerful technique, rooted in the fascinating realm of mathematics, is the Fibonacci Retracement. This guide will delve into the secrets of this time-tested method, revealing how it can unlock new opportunities and enhance your trading prowess in the ever-evolving crypto landscape. 

By harnessing the power of Fibonacci Retracements, you'll be able to identify key support and resistance levels, make informed decisions, and, ultimately, elevate your crypto trading game. So, buckle up and join us on this exciting journey as we unravel the mysteries of Fibonacci Retracements and their remarkable applications in the world of cryptocurrency trading.

Fibonacci is an infinite sequence of natural numbers. In crypto trading, the Fibonacci levels are the support and resistance levels derived from the famous number sequence.

Leonardo Pisano Bogolla discovered the Fibonacci sequence. The Italian mathematician discovered a relationship within a sequence of numbers that follows a pattern. The sequence starts at the second number, where each number in the sequence is the sum of the previous two numbers.

For example, 1+2 is equal to 3, and then 5(3+2), 8(5+3), 13(8+5), 21(13+8), etc., to infinity. The pattern is also used in financial markets and is a fundamental algorithm building block. These open or close trades automatically.

If you divide a number in the Fibonacci series by the immediate next number, you get a value close to 0.618 (for example, 8/13 = 0.6154). And if you divide a number by the number after that, the result is always close to 0.382 (for example, 8/21 = 0.381).

Technical analysis takes advantage of this characteristic by assuming that price fluctuations follow the Fibonacci retracements based on the laws discovered by Fibonacci.

The Fibonacci Retracement is a very popular tool used by many technical traders. It identifies strategic points for placing transactions, target prices, or stop-losses. After significant price fluctuations, the new support and resistance levels are often at or near these lines. Note that the Fibonacci Retracement levels are usually static and do not change like moving averages. This feature allows traders to anticipate and easily identify the support and resistance price points.

Remember that price fluctuation in cryptocurrencies is caused by market sentiment and the forces of supply and demand. Traders pay attention to these levels because liquidity converges there. The more traders pay attention to these levels, the higher the liquidity will be.

The different lines can be used for resets or targets depending on the strategy.

0.236 Fibonacci Retracement

Suitable for high momentum trades. The trend should show high volume. Do not trade against other resistances in the cryptocurrencies.

0.382 Fibonacci Retracement

This level is a rather less important level. The market most often moves on to the 0.5 Fibonacci retracement level.

0.5 Fibonacci Retracement

It is the most important and effective retracement of the Fibonacci tool. It depicts the average movement. Many algorithms and traders buy at half the price.

0.618 Fibonacci Retracement

Combined with the 0.5 Fibonacci retracement, this forms an effective entry and exit level. The market can oscillate between 0.382 and 0.618 retracements. It is where optimal pullback trades take place.

0.786 Fibonacci Retracement

It's one of the least important retracements. The trend is often long gone, and you should refrain from making a pullback trade here. More so, entering the trend will be less profitable.

The Fibonacci retracement tool is easily available on major crypto trading platforms; therefore, you don't need to calculate it manually. 

Let's make a number sequence that begins with zero and one. Then, add the sum of the two preceding numbers to the current one. If we keep doing this indefinitely, we'll get a number string called the Fibonacci sequence.

For instance, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987... and so on.

This Fibonacci sequence isn't directly applied to the chart; however, Fibonacci retracement ratios are driven mostly by these sequences. For instance, dividing a number sequence by the next Fibonacci level number sequence will give you a ratio close to 0.618.

Likewise, if you divide a number sequence with a number two places to the right, the answer will be a ratio close to 0.382. The Fibonacci retracement indicators use a formula to calculate the length of an upward or downward trend and divide it into four key levels. I won't make it any more difficult for you; instead, let's get to the meat of the matter.

Drawing the Fibonacci retracement zone on KuCoin is simple.

1. To begin, locate a completed trend to which you want to apply the Fibonacci retracement.

2. Locate the "Fibonacci retracement" charting tool. It's available on various charting programs, including the KuCoin market page and TradingView.

3. Once the tool is activated, make sure to first click at the beginning of the trend (1) and second click at the end of the completed trend (2).

4. Customize the visible levels to be 23.6 percent, 38.2 percent, 61.8 percent, and 78.6 percent.

The Fibonacci retracement levels will now appear on the chart. You should pay close attention to these levels to identify reversal points during the subsequent correction.

The Fibonacci retracement tool can be used as it indicates a buy or sell signal along with price targets. Fib retracement can be used as a buy signal for pullbacks during an uptrend. In a bearish market, the golden ratio can be used for short selling when resistances reject a Fibonacci retracement level. Using a momentum indicator such as stochastics or a MACD oscillator is advisable to determine the optimal entry and exit levels.

The Fibonacci ratio serves as potential support and resistance depending on the market trend. Typically, there's always a short pullback at these levels. So, it is wise to wait for the price to breach the levels for the second time before confirming a trend.

The most significant Fib retracement level to look out for is 0.618. It is the reciprocal of the Golden Ratio (1.618), where most traders buy or sell, depending on the market trend. 

In a bullish trend, greed reaches its peak here. However, nervous traders sell their holdings, resulting in a short-term pullback. Bargain hunters pounce back in the market to resume the upward trend.

The below BTC/USDT price chart shows that the market accurately respects all the Fibonacci Retracement levels.

In a bearish trend, fear reaches its peak at the 0.618 level. Nervous short sellers exit their positions, resulting in a short-term pullback. However, the buyers are exhausted, and the sellers push the price down and resume the downward trend. Always wait for the price to break below the 0.618 Fibonacci retracement level to confirm the bearish continuation. The same scenario can be observed in the Bitcoin price chart below.

In the financial markets, Fibonacci ratios help us determine support and resistance areas, and these trading levels help us enter and exit positions. Although Fibonacci ratios are powerful, designing a trading strategy that combines Fibonacci with other indicators to validate trades is preferable.

Thus, using Fibonacci retracement with oscillators such as RSI, MACD, and Stochastic indicators would be best. Candlesticks analysis complements Fibonacci levels. It helps us determine whether a particular Fibonacci level will hold or not.

The BTC/USDT displayed an uptrend on the 4-hour time frame chart; however, the digital asset entered the overbought zone and initiated a retracement. As seen on the chart, BTC/USDT completed a 50 percent Fibonacci retracement and closed a Doji candle above the 50 percent ratio, indicating that sellers are running out of options. BTC/USDT then closed a bullish engulfing candle, triggering a sharp uptrend. The length of an uptrend can be forecasted with the help of the Fibonacci extensions tool. That's all for now; let's move on to our final thoughts.

Fibonacci Retracement has proven itself as an indispensable tool for cryptocurrency traders seeking to navigate the unpredictable waters of this fast-paced market. Understanding and applying this mathematical marvel allows you to uncover hidden patterns, predict potential reversals, and make more informed decisions in your trading endeavors. 

As we've explored throughout this guide, the power of Fibonacci Retracement lies in its ability to blend the beauty of mathematics with the practicality of real-world trading strategies. Fibonacci Retracements are one of the most versatile tools for any crypto trader to determine entry and exit levels. 

By mastering this technique, you'll gain a deeper appreciation for the interconnectedness of numbers and markets and elevate your crypto trading skills to new heights. However, the retracements do not have a 100% probability of a successful trade. Therefore, always confirm their validity by pairing them with other reliable technical indicators or candlestick patterns. 

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