The Fibonacci retracement method uses a set of key numbers called Fibonacci ratios to identify the support and resistance levels of an asset/stock/cryptocurrency.
What Is a Fibonacci Retracement Level?
Developed by Leonardo Fibonacci in 1170 AD, Fibonacci ratios represent a set of key numbers (Fibonacci retracement levels) created by considering two extreme points of the ratios. These include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
How to Use Fibonnaci Retracement?
The Fibonacci sequence is a set of numbers that includes a certain pattern like, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Every number in this sequence is the sum of its previous two numbers and every number is 1.618 times greater than the previous number. The Fibonacci ratios are calculated simply by dividing the numbers in the Fibonacci sequence. For example, the ratio of 61.8% is calculated by dividing 21 by 34 or dividing 55 by 89. The same goes for every other Fibonacci ratio as well.
Fibonacci ratios identify the price momentum of an asset in the financial markets. Technical traders use them to draw support lines, visualize resistance levels, safeguard their capital by putting stop-losses at key Fib levels and set take-profit targets.
How to Draw Fibonacci Retracement?
Most traders use Fibonacci retracements on a 1D chart to identify the long-term trend of an asset. Another important thing that Fibonacci retracements tell a trader is to include resistance levels, support lines, stop-loss targets, and entry levels.
In the chart above, you can see that the Fibonacci retracement is drawn from the lowest point on the 1-day chart of Bitcoin (BTC) to its highest point. The Fibonacci ratios can be seen on the left-hand side along with support lines. Notice how BTC broke the 0.65 ratios, also called the ‘golden pocket’, and sprung up to the 0.382 level. When it broke that level, 0.382 became its support and it consolidated for a few days before breaking the 0.236 lines on the Fibonacci retracement chart.
What Is the Best Setting for Fibonacci Ratios?
Different traders use different ratios; however, the most common Fibonacci ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.