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Fibonacci Retracement: learn how to use it
Leonardo Pisano Bogollo, known as Fibonacci, was an Italian mathematician who introduced the Fibonacci retrograde sequence during the 13th century. This series of numbers reveals unique mathematical properties and relationships that manifest themselves in various aspects of nature, architecture and even biology.
The influence of these ratios goes beyond the physical and natural world, extending to the financial markets as well. This is one of the reasons why many traders apply trading strategies based on Fibonacci levels, as it allows them to identify possible turning points in the market.
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What are Fibonacci Retracements?
Fibonacci Retracement levels are horizontal lines that indicate where support and resistance are likely to occur.
They are based on Fibonacci numbers (Fibonacci numbers are a sequence of numbers where each successive number is the sum of the previous two numbers: 1, 1, 2, 3, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, etc.). Each level is associated with a percentage, the percentage is how much of a previous move the price has retraced. Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. While not officially a Fibonacci ratio, 50% is also used.
The indicator is useful because it can be drawn between two significant price points, such as a high and a low. The indicator will create the levels between those two points.
How to trade with Fibonacci Retracement?
One of the best ways to use the Fibonacci Retracement tool is to spot possible support and resistance levels and see if they line up with the Fibonacci Retracement levels.
If the Fibonacci levels are already support and resistance levels, and you combine them with other price areas that many other traders are watching, then the chances of the price bouncing off those areas are much greater.
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As you can see from the chart above, it has recently been in an uptrend- look at all those green candles! So you can decide what you want to participate in this long BTC/USDT trend . But the question is, “When do you enter?” Get out the Fibonacci Retracement tool, mark the Swing Low and Swing High. Now your chart looks pretty good with all those Fibonacci Retracement levels.
Now that we have a framework to increase our probability of finding a solid entry, we can answer the question “Where should I enter?” You look back a bit and see that the price of 9185.37 was a good resistance level in the past and just happens to line up with the 50.0% Fibonacci Retracement level. Now that it is broken, it could become support and be a good place to buy.
If I were to set an order somewhere around the 50.0% Fibonacci level, I would be a pretty happy trader! Price tried to break through the support level, but was unable to close below it. Eventually, the pair broke above the Swing High and resumed its uptrend. You can also do the same setup in a downtrend. The point is that you should look for price levels that appear to have been areas of interest in the past.
Why do investors use Fibonacci retracements?
Investors turn to Fibonacci retracements because markets rarely move in a linear fashion, and often have temporary dips known as pullbacks or pullbacks. Fibonacci retracements help identify the level to which a market might temporarily reverse before continuing its original trend.
This tool is based on the golden ratio, a mathematical sequence in which each number is approximately 1.618 times larger than the previous one. The Fibonacci sequence is: 0, 1, 1, 1, 2, 3, 5, 8, 8, 13, 21, 21, 34, 55, 89, 144, and so on.
To calculate Fibonacci retracement levels, technical analysts draw six lines on the chart of a financial asset. The main lines correspond to 100% (highest point), 0% (lowest point) and 50% (midpoint). The other three are placed at the 61.8%, 38.2% and 23.6% levels, which are derived from key Fibonacci ratios. These levels can help investors identify potential support and resistance points in an asset, providing crucial points for making entry or exit decisions in the market.
Advantages and Disadvantages of using Fibonacci Retracements
But like any trading strategy, the Fibonacci Retracement has some advantages and disadvantages to be aware of.
Advantages of using Fibonacci Retracement
✅ Fibonacci Retracements offer an effective tool for confirming hypotheses about market movement.
✅ Their support and resistance levels allow investors to identify potential uptrends or downtrends, which can help determine the optimal time to open or close positions.
✅ For experienced traders, this technique can be of great use in detecting key areas in price behavior.
Disadvantages of using Fibonacci Retracement.
❌ However, using Fibonacci retracements effectively requires a high level of knowledge and experience.
❌ Traders must correctly interpret the levels on the chart to avoid mistaking a simple correction for a more permanent trend change. For this reason, it is recommended that novice traders use this indicator with caution.
❌ Additionally, some experts argue that Fibonacci retracements can act as a self-fulfilling prophecy.
❌ Since many traders use this analysis tool, orders are often concentrated on the same price levels, which could influence the direction of the market.
Conclusions
We understand that it may be difficult to master the Fibonacci Retracement, so we would like to conclude the following:
- Fibonacci Retracement levels connect any two points that the trader considers relevant, usually a high point and a low point.
- The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8% and 78.6%.
- The percentage levels provided are areas where the price could stagnate or reverse.
- Countertrend moves tend to fall within certain parameters, which are often Fibonacci retracement levels.
- These levels should not be relied upon exclusively, it is dangerous to assume that the price will reverse after reaching a specific Fibonacci level. For this reason, you can learn about trading and technical analysis.
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- Fibonacci Retracement: learn how to use it
- What are Fibonacci Retracements?
- How to trade with Fibonacci Retracement?
- Why do investors use Fibonacci retracements?
- Advantages and Disadvantages of using Fibonacci Retracements
- Advantages of using Fibonacci Retracement
- Disadvantages of using Fibonacci Retracement.
- Conclusions
- Keep learning 🤓