What Are Fibonacci Retracement Indicator Levels?
One popular tool when trading cryptocurrencies is called the Fibonacci Retracement indicator. It’s intended to help traders find the right times to buy and sell, and for cryptocurrency traders who understand its methods and madness, it can prove quite useful.
The Fibonacci number sequence helped to produce a ratio of 61.8%, which in math circles is called the “Golden Mean.” While the math speak will go over most people’s heads, it’s important to know that the Fibonacci sequence is often found in the geometry of nature, such as animal skin, DNA structure, and even the spiral shells of seashells. We also see the Golden Ratio with regard to human behavior.
For instance, when people are asked to choose between two value-neutral options, studies show those responses are split 62-38, not 50-50. As you can figure out, 62% is simply rounding up from the Golden Mean of 61.8%. The Golden Mean is now starting to be seen in our financial markets. We now see that financial markets, in both price and time, advance by 100% and retrace 61.8%.
In simple terms, Fibonacci retracement refers to areas of support or resistance. The Fibonacci levels that we use are 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels are static, which makes them easy to identify. They are inflection points that allow traders to anticipate points where there will either be a bounce or break. For those who understand them, they indicate a place to either buy or pullback if there’s an uptrend, whereas the Fibonacci retracement levels can indicate short selling during a downtrend.
By far, the most important Fibonacci level is 0.618, the Golden Mean. This is the point where sellers give up while those looking for a bargain get into the market. Of course, some traders won’t make a move until the price moves 5 to 10% above or below the Fibonacci level to confirm their speculation. This is not a bad move since the Fibonacci levels won’t be precise.
Let’s test the Fibonacci retracement levels with regard to BTC, which reached its peak value on December 16, 2017 before declining. The 23.6% Fibonacci level was tested on on December 23 when the price broke through that level. By January 6, the price had climbed above and then fell below the 23.6% level.
The price them broke down through the 38.2% level on January 16, 2018. On January 20, the price briefly came back to that level before a sudden decline. The 61.8% level was tested on March 20 when the price broke through that level only to rebound the next day. The price broke through that level again on March 28. On April 6, the price of BTC had retraced 66% from its December 16 peak. But since that point, it has started trending upward again.
Meanwhile, it’s important to know that there was not much volume accompanying the December 16 peak, indicating it was likely to drop soon. However, volume did increase when the price broke the 23.6% level, but not when it climbed above 23.6% on January 6. The volume continued to decline until a spike a spike that coincided with the 61.8% being tested on March 28. Volume then remained low following this point, indicating an upswing may not be in the cards.
However, since the 66% was tested on April 6, volume has started to increase, letting us know that we may have reached the bottom and should expect things to pick up. Remember, the Golden ratio is 61.8%, which is within the 66% level, and based on human behavior, the market typically traces back 61.8%. Barring outside influences like world political or financial events, savvy cryptocurrency traders could buy at the 23.6% level of the decline.
Serious cryptocurrency traders should keep in mind that Fibonacci levels are merely points of interest. Prices will not always swing from one Fibonacci level to the other. Indicators like volume or momentum are also important to monitor to help confirm what you know about Fibonacci levels. You should also not expect to see retracement levels to be exact. Instead, have a range of 10 to 15% for those targets.
Also, keep in mind that high-volume markets are more likely to show retracement levels. When dealing with individual stocks, this may not be the case. As it relates to cryptocurrency, the main players like BTC and ETH will be more likely to show retracement levels than minor tokens.
Most importantly, the Fibonacci tool is not going to be simple and easy to use in most circumstances. It’s simply one additional tool you can use to calculate probabilities, and playing those probabilities the right way is what will lead you to maximize your success.