Fibonacci numbers are a sequence of numbers in which each is the sum of the previous two (i.e., the number 3 is the result of the first two). It starts with 0 and 1, and then each subsequent number is obtained by adding the previous two: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, etc.
In trading, Fibonacci numbers are used to determine support/resistance levels and potential trend reversals.
Fibonacci expansion is a technical analysis tool used in trading to identify potential support and resistance levels in the market. They are based on a numerical sequence known as the Fibonacci sequence, which is found in many aspects of nature and financial markets.
Major Fibonacci levels include 23.6%, 38.2%, 50%, 61.8%, 100%, 127.2%, 161.8%, 200%, and so on. They make it possible to determine alert zones before a trend reversal or continuation.
These levels are calculated by applying the ratios of Fibonacci numbers to the previous price movement in the market.
Traders often use Fibonacci projection levels and Fibonacci retracements.
Difference between Fibonacci retracement and projection of Fibonacci levels
The difference between Fibonacci-level projection and Fibonacci-level retracement lies in their purpose, use, and interpretation in technical analysis. Both tools are based on the Fibonacci numerical sequence, but they are used in different situations.
Fibonacci projection is used to predict targets after a pullback is completed and the trend resumes. This tool helps traders predict where the price may meet resistance or end a move. At such points, it is usually necessary to lock in a portion of the position.
The projection of Fibonacci levels includes the following key levels: 100%, 127.2%, 161.8%, 200%, 261.8%, and 423.6%. The most important level is considered to be 161.8%, which is also called the “golden ratio”.
For example, the price of an asset intraday rose from $100 to $120. After encountering significant selling volume, the price pulled back to $110. This support level held and the trader opened a long position. To determine the potential profit-taking level, we plot the Fibonacci projection on the chart at $100 and $120. We specify the pullback level of $110 and projection levels above $110 will be automatically built on the chart. As a result, the trader will see the following levels:
- 100% – $130
- 127,2% – $134,54
- 161,8% – $140,36
- 200% – $150
In this scenario, our intraday trader would fix 20% of the position at the 100% level ($130), another 20% at 127.2% ($134.54), and as mentioned above — at the 161.8% level ($140.36) it is better to fix a minimum of 50%.
The Fibonacci retracement is used to identify possible retraction levels of a price chart. This tool helps traders and investors understand where the price can stop trend correction and continue moving in a bullish or bearish direction.
The main purpose of the projection is to find support or resistance levels during a trend correction phase and use them as entry points or stop-loss setups.
Fibonacci retracement is an indispensable tool for both short-term and long-term trading.
Let’s consider an example of intraday trading. The price of an asset has increased from $100 to $120. The trader wants to open a position in the direction of the local intraday trend. To do this, it will be necessary to identify potential retraction zones. To do this, Fibonacci levels should be applied to the chart, starting from $100 to $120. The tool will automatically calculate the percentage levels of the correction. As a result, the trader will see the following levels:
- 23,6% – $115,28
- 38,2% – $113,64
- 50% – $110
- 61,8% – $108,36
In practice, it is best to wait for the 38.2% level. With a deeper correction, there is a risk of reversal. Price movements in such a case will change and the trend will change. In our case, the price reaches 38.2% ($113.64) after which a “hammer” candlestick pattern with abnormally large volume is formed. This will be the signal to open a position. Stop-loss is placed at the level of 50% ($110).
Using Fibonacci levels in conjunction with other indicators
Fibonacci levels help traders determine where price may reverse or find support after a pullback.
For example, if the price of an asset falls and reaches the 38.2% Fibonacci level from the previous upward move, this may indicate a potential support zone. There, the trader should expect a resumption of growth.
Fibonacci levels are also effective when used in conjunction with other indicators and signals. Traders often combine them with technical indicators such as moving averages or RSI.
For example, after an upward move, the price has fallen to the 38.2% Fibonacci level while the price holding the 200 MA and the RSI is in the neutral zone, showing no divergence. In this case, the trader can safely open a long. The entry point will be the 38.2% level. And thanks to multipliers, you can increase your potential earnings up to 50x.
Fibonacci levels can be applied to different short- and long-term time intervals. Thanks to this feature, Fibonacci levels are adopted by short-term traders and experienced investors.
In practice, an intraday trader can apply the Fibonacci grid on a daily or weekly chart. Determine the general trend, and valuate other indicators (which are used in the trading system). Then the trader moves to smaller timeframes (from 1 minute to 1 hour) and also applies the grid on the chart. If the price tests one of the main levels of 38.2%, 50%, or 61.8% — a position opening will follow. Do not forget that these levels are also used as resistance. Therefore, you can use the Fibonacci levels to determine the Higher High or Lower High formations.
Fibonacci levels should be used to limit risks and define your targets. Traders can place their stops at the major levels (38.2%, 50% or 61.8%). And if a short position was opened at a local high, together with the Fibonacci grid, put Take Profit at the same 38.2%, 50%, or 61.8% (if the original plan was to “catch” a pullback, then exit at the 38.2% level).
The MOVO platform allows you to set up Take Profit and Stop Loss orders quickly and conveniently.
Conclusion
Fibonacci levels are a powerful technical analysis tool for traders to identify potential support and resistance levels in the market. But their use requires understanding and experience. Proper application of the Fibonacci levels strategy will increase the efficiency of trading on both cryptocurrency and stock markets. It will allow you to make informed, correct trading decisions.
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