Understanding Fibonacci Retracement Levels in Crypto

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Fibonacci retracement levels are a tool used in technical analysis to identify areas of support and resistance in financial markets. They are horizontal lines that are drawn between two major price points, such as a high and a low. The levels are associated with specific percentages, which represent how much of the previous move in price has been retraced. The percentages used are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. 

<source: wikipedia>

While the indicator is named after Leonardo Fibonacci, an Italian mathematician, the sequence and numbers were actually formulated in ancient India.

Contrary to its name, the Fibonacci sequence was not actually created by Fibonacci himself. Indian mathematicians had already developed and used it centuries before it was introduced to western Europe. The credit for creating the sequence and method of sequencing is generally given to Acarya Virahanka, who developed the Fibonacci numbers around 600 A.D. 

Other Indian mathematicians such as Gopala, Hemacandra, and Narayana Pandita continued to refer to the sequence and its method. Pandita even correlated the sequence with multinomial coefficients, expanding its use. Fibonacci numbers are believed to have been known in Indian society as early as 200 B.C.

There is no specific formula for calculating Fibonacci retracement levels. Instead, the user selects two points on a chart, usually the absolute lows and highs, and then the retracement lines are drawn between those points.

For example, if the price moves from $10 to $15 and those two levels are used to draw the retracement indicator, the 23.6% level will be at $15 - ($5 × 0.236) = $13.82, and the 50% level will be at $15 - ($5 × 0.5) = $12.50. To calculate Fibonacci retracement levels, you simply choose a price range and apply the predetermined percentages associated with the levels. 

However, the origin of the fib numbers is related to the Golden Ratio, which is a special number that is found in various natural phenomena, such as galaxy formations, shells, and even in human DNA. The Fibonacci sequence is based on adding the prior two numbers in a sequence, which yields a number string that is used to derive the ratios for the Fibonacci retracement levels. These ratios are based on mathematical calculations that involve the Golden Ratio, except for 50%.

Fibonacci retracement levels can be used to make trading decisions such as entry orders, stop-loss levels, and price targets. For example, a trader may observe a stock moving higher, retracing to the 61.8% level, and then starting to go up again. Since the bounce happened at a Fibonacci level during an upwards motion, the trader decides to buy and sets a stop loss at the 61.8% level. 

These levels are also important in other technical analysis methods, such as Gartley patterns and Elliott Wave theory, which find that reversals tend to occur near certain Fibonacci levels. Unlike moving averages, these levels are static, making them easy to identify and anticipate. They serve as inflexion points where some type of price action is expected, either a reversal or a break.

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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.