The knowledge of volatility is important in making a profit out of your cryptocurrency trading. Whether it’s spot, futures, or option trading, a better measurement of the factor can make a difference to the outcomes. At PCEX Member, the leading cryptocurrency exchange, we take it as our responsibility to inform our customers of the tools and techniques required to maximize benefits on their crypto investment. Fibonacci Retracement is one of them.
Fibonacci retracement is technical analysis for determining support and resistance levels. Unlike reversal, retracements are short-term periods of the movement against a trend, followed by a return to the previous trend.
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The below chart shows the value of Function coin (FCC) cryptocurrency in terms of INR. On both the downtrend and uptrend, there are several Fibonacci Retracement points marked as FR.
Retracement Vs. Reversal
The term retracement shouldn’t be confused with the reversal. It’s a minor or short-term pullback in the price of a cryptocurrency. In this, the price of the security does not breach the support and resistance levels nor does it breach the uptrend or downtrend. If the price of the security falls, moves up or down above support or resistance, or violates an uptrend or downtrend, then it is taken as a reversal. Experts warn of using the retracement data alone in your trading decision-making. Juxtapose the data with other technical indicators before you apply it.
Fibonacci Retracement Levels
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage of how much of the price has retraced of a prior value. The mathematics involved can be understood from a simple example. Suppose the price of a stock rises $10 and then drops $1.36. The retraced percentage equals 1.36÷10×100=13.6%.
Understanding Fibonacci Numbers
In mathematics, the Fibonacci numbers commonly denoted Fn, form a sequence, called the Fibonacci sequence, such that each number is the sum of the two preceding ones, starting from 0 and 1.
Fn= F{n-1} + F{n-2}
for n > 1.
The sequence starts as 0,1,1,2,3,5,8,13,21,34, …
Creating Fibonacci Retracement Levels
There is no formula as such to calculate Fibonacci retracement levels. We can’t calculate, but can create it to know the underlying situations and have a better future move. The levels are plotted using the quotients (Golden Ratio) of Fibonacci numbers. Once those two points are chosen, the lines are drawn at percentages of that move.
As we said, Fibonacci retracement levels are obtained from the Fibonacci numbers, let’s find out the Golden Ratio. Consider the string 0,1,1,2,3,5,8,13,21,34, … Observe the table below, where we have divided a number by the number to its immediate right.
| 0÷1 | 0 |
| 1÷1 | 1 |
| 1÷2 | 0.5 |
| 2÷3 | 0.66 |
| 3÷5 | 0.6 |
| 5÷8 | 0.625 |
| 8÷13 | 0.615 |
| 13÷21 | 0.619 |
| 21÷34 | 0.618 |
After the sequence gets going, dividing one number by the next number yields 0.618, or 61.8%, which is also called the Golden Ratio. Interestingly, the Golden Ratio of 0.618 or 1.618 is found in sunflowers, galaxy formations, shells, historical artifacts, and architecture.
How to Use Fibonacci Retracement?
From placing entry orders to determining stop-loss to setting price targets – experts use Fibonacci retracements everywhere to maximize benefits and minimize risks. Unlike moving averages that are dynamic, Fibonacci retracement levels are static prices that make it easy for anyone to comprehend the chart and respond to a situation. However, beginners should exercise some caution to understand whether the change is temporary or permanent.
Combine the inputs of Fibonacci retracements with candlestick charts or other forms of trade measurement tools to make better trading decisions.
