Fibonacci Trading Strategy: Fibonacci Retracements

Following trends and detecting price reversal points in the cryptocurrency markets can be a hard task without the proper tools. Fibonacci retracements offer a reliable ground to accomplish that task with high accuracy.

In this article, we will explore the possible applications of these retracements, and how they work, what they mean, and how to identify and trade them.

What Is The Fibonacci Tool?

Developed on top of the mathematical sequence discovered by Leonardo Fibonacci, this technical tool suits trading analysis goals when it comes to evaluating and following trending markets. The approach behind the Fibonacci tool is revealing different retracement levels and how they can be used to identify potential support and resistance levels.

These retracements that follow the mathematical sequence may also enable traders to find potential reversal points and money-making opportunities in the cryptocurrency markets. Generally, using a trading platform like Altrady is the best way to implement this tool. Manually calculating the Fibonacci retracement level can be hard for traders and carry inaccuracy.

How Do Traders Use Fibonacci?

Fibonacci retracements are used by traders to:

• Detect a price that may find support or resistance when it reaches a Fibonacci retracement level.
• Calculate stop-loss and take-profit levels using Fibonacci retracements.
• If a price retraces to a Fibonacci level and then reverses, it may indicate a trend reversal.
• To identify potential price targets in the extended version of the Fibonacci retracements.

In addition to Fibonacci retracements, moving averages, RSI, and MACD can be used with Fibonacci retracements to improve the reliability of the analysis readings.

Benefits of Fibonacci Retracements

Fibonacci can offer traders a ground to build a systematic approach to trading cryptocurrencies, which can be very unpredictable assets and can induce irrational behaviors when they cannot establish a direction but traders still try to find a trading opportunity.

In this sense, the Fibonacci retracement strategy can be beneficial for traders in the following manners:

• Implementing an objective tool based on mathematic principles for identifying support and resistance levels.
• Taking advantage of versatile retracements that can be used in a wide range of market conditions, but preserving the same approach, hence a systematic trading framework.
• It is relatively straightforward to interpret and use the levels once they have been calculated.
• Using Fibonacci retracements successfully can increase profitability as the trade setups are easier to detect.

One relevant extra benefit to mention, concerning the way traders can use this tool, is that it may help traders implement techniques based on three advanced concepts:

1. Compound Interest.
2. Adding more to winning positions.
3. Cutting losses rapidly before they hit stop-loss targets.

So, how exactly can traders apply those techniques? Let's point out some options according to trading styles:

• For day traders, whenever they are in a winning position and the price retraces to a Fibonacci level, it is easier to add more to that position if the price stops at the level and continues in the established direction, as the level provides confidence. Otherwise, a breakout of the level can induce traders to close the position manually with fewer losses or in the best case, with a small profit.
• For swing trading, as this style can stick to long-term and mid-term trends, traders can opt not only to add more to a winning position but also to compound their trade sizes as the trends sustain for days offering new trading opportunities.

Understanding Fibonacci Retracements

The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding ones; 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on. To calculate Fibonacci retracements, traders should divide the range between high and low prices through those numbers.

The most typically used levels include:

• 23.6%: The minor of the retracements, indicating a brief pullback for a trend continuation.
• 38.2%: This level is more significant, however, it still stays in the established trend.
• 50%: A retracement representing more weight, indicating a potential trend reversal.
• 61.8%: Meaningful retracement within a trend that often indicates a deep pullback before the trend continues.
• 78.6%: A stronger retracement representing more probabilities for a trend shift than for a continuation.
• 100%: This retracement is a complete reversion to the beginning of the Fibonacci Tool

Identifying Fibonacci Retracements

For traders to identify Fibonacci retracements on a chart, they could:

• Determine a high and low: Select a recent swing high point and a swing low price point to plot the Fibonacci tool across them.
• Draw a Fibonacci retracement tool: Using the Fibonacci retracement tool in a platform like Altrady allows traders to connect lines between high points and low points.
• Identify retracement levels: This tool will automatically calculate and reveal these levels in the form of horizontal Fibonacci lines in the chart.

Trading with Fibonacci Retracements

The following are possibilities that can be accomplished using Fibonacci retracements.

Detect likely support as well as resistance levels

These levels can serve as reliable price zones to:

• Set stop-loss and take-profit orders
• Use Fibonacci retracements to determine appropriate stop-loss and take-profit levels.

Confirm trend reversals combined with other indicators

If the price retraces to a Fibonacci level and then reverses, it may signal a trend reversal. Traders can use additional technical indicators like the RSI, MACD, or Moving Averages to enhance the reversal suggestion.

• Using The RSI: Traders can leverage on a divergence or overbought/oversold conditions to confirm the price action on a Fibonacci level.
• Using The MACD: Traders can detect MACD crossovers to confirm potential reversal price movements suggested by the Fibonacci tool.
• Using The MACD: Similar to MACD crossovers, traders can detect a cross of a longer period SMA or EMA above or below a shorter one to confirm potential reversal price movements suggested by the Fibonacci tool.

Conclusion

Up to this point, Fibonacci retracements have demonstrated to be exceptionally suitable for trading markets.

It can help identify support and resistance at different levels such as 38.2%, 50%, and 78.6%, each one presenting a thesis for future price movements. In Altrady you can use the Fibonacci tool on paper trading for free during a free trial account.