How to Properly Use the Fibonacci Retracement Tool
I've recently come across a lot of posts where the fibonacci retracement tool was erroneously used, and this gave me a good idea for an educational post.
Introduction: The Fibonacci Sequence
- Before talking about fibonacci retracements, it's important to understand what fibonacci sequences are.
- Fibonacci sequences are numbers that are equal to the sum of the preceding two numbers, starting with 0 and 1.
- So a fibonacci sequence would look like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on.
- The fibonacci sequence is also known as nature's code, as these numbers are commonly found among nature as well. The number of petals of flowers is a prime example.
The Fibonacci Ratio
- The fibonacci ratio is derived by dividing the numbers within the fibonacci sequence
- The 0.618 (61.8%) for instance, is approximately the value when we divide 21 by 34, and 55 by 89
- The 0.382 (38.2%) ratio is calculated by dividing a number by another number located two spots to the right.
- The 0.236 (23.6%) is calculated by dividing a number by another one three spots to the right.
- Just like the fibonacci sequence, fibonacci ratios are commonly found in nature as well, through flowers, galaxy formations, and spirals on shells
Fibonacci Retracement
- The fibonacci retracement is a tool in which horizontal lines are drawn to help traders identify support and resistance
- These horizontal lines are based on the fibonacci ratios
- Interestingly enough, just as the fibonacci ratios are commonly found in nature, they are also found in the market, reflected by charts
- A fibonacci retracement can be identified by connecting the swing high to the swing low of a downtrend, and the swing low to swing high of an uptrend
- The connection between the high and low points are where most traders get confused.
Application
- On the left hand chart, we can see that the swing high has been connected with the swing low
- As a result, we could identify possible resistance levels for Bitcoin's bullrun in 2019.
- Prices touched the 0.618 fib resistance level , and eventually attempted to break the 0.5 fib, but failed
- We can also see that the 0.382 and 0.786 levels played a key role as support and resistance
- On the right hand chart, we can see the swing low connected to the swing high
- Based on the fib levels of this retracement, we could identify strong support at the 0.786 level, around 4k.
Conclusion
The fibonacci retracement tool can be a very effective way to identify areas of support and resistance , but they need to be applied correctly. Don't forget to connect the swing highs and lows based on the trend!
If you like this educational post, please make sure to like, and follow for more quality content!
If you have any questions or comments, feel free to comment below! :)
Introduction: The Fibonacci Sequence
- Before talking about fibonacci retracements, it's important to understand what fibonacci sequences are.
- Fibonacci sequences are numbers that are equal to the sum of the preceding two numbers, starting with 0 and 1.
- So a fibonacci sequence would look like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on.
- The fibonacci sequence is also known as nature's code, as these numbers are commonly found among nature as well. The number of petals of flowers is a prime example.
The Fibonacci Ratio
- The fibonacci ratio is derived by dividing the numbers within the fibonacci sequence
- The 0.618 (61.8%) for instance, is approximately the value when we divide 21 by 34, and 55 by 89
- The 0.382 (38.2%) ratio is calculated by dividing a number by another number located two spots to the right.
- The 0.236 (23.6%) is calculated by dividing a number by another one three spots to the right.
- Just like the fibonacci sequence, fibonacci ratios are commonly found in nature as well, through flowers, galaxy formations, and spirals on shells
Fibonacci Retracement
- The fibonacci retracement is a tool in which horizontal lines are drawn to help traders identify support and resistance
- These horizontal lines are based on the fibonacci ratios
- Interestingly enough, just as the fibonacci ratios are commonly found in nature, they are also found in the market, reflected by charts
- A fibonacci retracement can be identified by connecting the swing high to the swing low of a downtrend, and the swing low to swing high of an uptrend
- The connection between the high and low points are where most traders get confused.
Application
- On the left hand chart, we can see that the swing high has been connected with the swing low
- As a result, we could identify possible resistance levels for Bitcoin's bullrun in 2019.
- Prices touched the 0.618 fib resistance level , and eventually attempted to break the 0.5 fib, but failed
- We can also see that the 0.382 and 0.786 levels played a key role as support and resistance
- On the right hand chart, we can see the swing low connected to the swing high
- Based on the fib levels of this retracement, we could identify strong support at the 0.786 level, around 4k.
Conclusion
The fibonacci retracement tool can be a very effective way to identify areas of support and resistance , but they need to be applied correctly. Don't forget to connect the swing highs and lows based on the trend!
If you like this educational post, please make sure to like, and follow for more quality content!
If you have any questions or comments, feel free to comment below! :)
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