In this article, we will be studying the topic “What is Fibonacci Retracement ?“. Also, we will look at the topic’s relationship with, indicators, traders, resistance levels , support lines, etc.
As the name implies, Leonardo Fibonacci is the founder of Fibonacci Retracement Level back in 1170 AD. Also, Fibonacci ratios represent a set of these levels and one can create them by taking note of two end ratios. The following are examples of Fibonacci Retracement Levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
The horizontal lines on the chart can represent Fibonacci retracement levels. These levels also indicates bottom and top lines respectively. A specific portion rhymes with each Fibonacci level. It equally shows the distance of price reversal from an earlier trend. The trader expects this previous move to continue in the same direction. However, the price usually reverses to one of the Fibonacci levels before this occurs.
Application of Fibonacci Retracement
The Fibonacci retracement have a particular pattern that they follow. Example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. In order to get the next number, you have to add the two previous numbers present. Also note that each number is 1.618 times less than the number that comes after it. We calculate the Fibonacci ratios by dividing the numbers in the Fibonacci pattern. For example, to get the ratio of 50%, we simply divide 2 by 1. This same method applies to other Fibonacci ratios.
These ratios indicates the price action of an asset in the financial markets. The importance of Fibonacci levels to technical traders are as follows:
- Drawing support lines
- Monitoring resistance levels
- Securing capital: This is done by setting various stop loss at important Fibonacci levels. Also setting targets for taking profits as well.
Pictorial Representation of Fibonacci Retracement
The representation of Fib retracements on a 1 day time frame indicates long-term trends. A lot of long-term traders make use of this time frame. Fibonacci retracements also helps traders to apply resistance and support lines, stop-losses. They also remind them where and when to enter trades.
From the diagram above, the Fibonacci retracement is drawn from the support level to resistance level. A time frame of 1D of Bitcoin is the focus too. The Fibonacci ratios and support lines are both visible on the left side of the chart.
Notice how BTC broke the 0.65 ratios, and went straight up to the 0.382 level. The former is also known as the golden pocket. As it crosses that level, 0.382 becomes its support level. After some days, it unites right before breaking the 0.236 lines on the Fibonacci retracement chart.
The Best Setting for Fibonacci Ratios
Despite the fact that a lot of traders apply various ratios, we have the common ones. They include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
However, Fibonacci retracements are indicators for technical analysis. They also have disadvantages just like other indicators. As a new trader, you should bears those in mind before investing your capital. It functions perfectly for few assets, this makes it very beneficial. A huge amount of traders have to apply the same Fibonacci ratios to be favourable to the market. This will equally show the price action of the asset in use. However, this indicator is not 100% efficient. Therefore one is advised to apply other indicators when conducting your technical analysis. Alternatives available include:
- Relative Strength Index (RSI)
- Moving Average Convergence Divergence (MACD)
- On-Balance Volume (OBV indicator)
- Aroon indicator, and
- Stochastic Oscillator.