Using the Fibonacci Retracement Tool
First, let’s start from what exactly the Fibonacci Sequence is: F(n+1)=Fn+ F(n-1). Now this may look scary to some of you, and you may be having flashbacks to high school math, but all this equation simply means is that the next number is the sum of the previous two numbers. So 0+1 = 1, 1+1=2, 2+1=3, 3+2=5, etc.
Here is a simple table for the first few numbers:
0-1-2-3-4-5-6-7
1-1-2-3-5-8-13-21
When we move along the Fibonacci sequence, the ratio of any number and the one preceding it is 1.618 (34/21, 144/89, 987/610, etc.). This is called the ‘Golden Ratio’ or ‘Phi’
Additionally, there are other important ratios related to the Golden Ratio. These are:
• .236 – Any number divided by the number three places ahead
• .382 – Any number divided by the number two places ahead
• .5 – Not really a Fibonacci ratio, but a useful one all the same
• .618 – Any number divided by the number one places ahead
• .786 – The square root of .618
These ratios are the ones used in a Fibonacci Retracement.
What time frame should I use?
As with everything in Crypto, it depends. If you are swing trading, buying and holding for 2-4 weeks, then I’d recommend you look at a period of 1-3 months. Of course, over this time period, your crypto should be trending up if you want to go long.
You can even use the Fib Retracement tool if you want to be a diamond handed HODLer. Using this tool to spot lows so that you can DCA into the crypto is a strategy that will get you better prices than just simply buying in weekly.
So how do we use it? Find the trend
First, we need a clearly defined uptrend. Doing this in a bull market is not terribly difficult. It is a bit harder in a bear market, but it can still be done. An uptrend is when we have a set period of time where we are making higher highs and higher lows. You can see this by placing trend lines on the chart.
Sometimes the candles will wick, or even close, outside the trend lines. This is not a big deal as the trend lines are there to establish the current momentum.
In general, it is better to trade WITH the momentum of the market instead of against it.
Higher highs and higher lows define the uptrend.
That’s great, but how does it make me gains?
The best thing that this tool does is give you a good entry point on a crypto that is trending up; an antidote to the poison of buying the peaks.
You will lose money if you do this. I repeat. Do not buy at the peak.
As we know, prices do not go up in a linear way. They go up and come back down, then back up, etc. Fib Retracements are the tool that helps find that new bottom.
Another way to phrase this is that the ratios that we discussed earlier can be used to find both support and resistance.
Drawing a Fibonacci Retracement is simple on a platform like Trading View. Just click the button that says ‘Fib Retracement’ and draw from the lowest low all the way to the highest high. Flip this if you are looking to short.
To make this chart look a lot nicer just click the gear that appears when the Fib Retracement is selected.
Then select ‘Extend Lines Right'
Viola!
As is shown on the chart the price of ETH bounced on the .618 and repeatedly on the .5 level. These would be excellent times to buy.
So, if you got your hopes up and jumped too in to early, you would have seen a fairly large pullback. Many people would sell at this point because they are scared that their crypto will crash. However, the Fib Extension shows the likely levels of support.
The savvy investor, you, will not even enter until this pull back has happened. It is impossible to exactly time the bottom. The Fib Extension can help use get closer with more accuracy.
Final thoughts
No single tool is going to lead you to the moon. It is important to know that having a successful investing strategy requires you to use this tool in conjunction with others. This is just one important piece of the overall puzzle.
If you found this useful, please like, comment, and follow! Thank you!
Here is a simple table for the first few numbers:
0-1-2-3-4-5-6-7
1-1-2-3-5-8-13-21
When we move along the Fibonacci sequence, the ratio of any number and the one preceding it is 1.618 (34/21, 144/89, 987/610, etc.). This is called the ‘Golden Ratio’ or ‘Phi’
Additionally, there are other important ratios related to the Golden Ratio. These are:
• .236 – Any number divided by the number three places ahead
• .382 – Any number divided by the number two places ahead
• .5 – Not really a Fibonacci ratio, but a useful one all the same
• .618 – Any number divided by the number one places ahead
• .786 – The square root of .618
These ratios are the ones used in a Fibonacci Retracement.
What time frame should I use?
As with everything in Crypto, it depends. If you are swing trading, buying and holding for 2-4 weeks, then I’d recommend you look at a period of 1-3 months. Of course, over this time period, your crypto should be trending up if you want to go long.
You can even use the Fib Retracement tool if you want to be a diamond handed HODLer. Using this tool to spot lows so that you can DCA into the crypto is a strategy that will get you better prices than just simply buying in weekly.
So how do we use it? Find the trend
First, we need a clearly defined uptrend. Doing this in a bull market is not terribly difficult. It is a bit harder in a bear market, but it can still be done. An uptrend is when we have a set period of time where we are making higher highs and higher lows. You can see this by placing trend lines on the chart.
Sometimes the candles will wick, or even close, outside the trend lines. This is not a big deal as the trend lines are there to establish the current momentum.
In general, it is better to trade WITH the momentum of the market instead of against it.
Higher highs and higher lows define the uptrend.
That’s great, but how does it make me gains?
The best thing that this tool does is give you a good entry point on a crypto that is trending up; an antidote to the poison of buying the peaks.
You will lose money if you do this. I repeat. Do not buy at the peak.
As we know, prices do not go up in a linear way. They go up and come back down, then back up, etc. Fib Retracements are the tool that helps find that new bottom.
Another way to phrase this is that the ratios that we discussed earlier can be used to find both support and resistance.
Drawing a Fibonacci Retracement is simple on a platform like Trading View. Just click the button that says ‘Fib Retracement’ and draw from the lowest low all the way to the highest high. Flip this if you are looking to short.
To make this chart look a lot nicer just click the gear that appears when the Fib Retracement is selected.
Then select ‘Extend Lines Right'
Viola!
As is shown on the chart the price of ETH bounced on the .618 and repeatedly on the .5 level. These would be excellent times to buy.
So, if you got your hopes up and jumped too in to early, you would have seen a fairly large pullback. Many people would sell at this point because they are scared that their crypto will crash. However, the Fib Extension shows the likely levels of support.
The savvy investor, you, will not even enter until this pull back has happened. It is impossible to exactly time the bottom. The Fib Extension can help use get closer with more accuracy.
Final thoughts
No single tool is going to lead you to the moon. It is important to know that having a successful investing strategy requires you to use this tool in conjunction with others. This is just one important piece of the overall puzzle.
If you found this useful, please like, comment, and follow! Thank you!
Disclaimer
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