The Fibonacci retracement tool is popular in technical analysis for identifying support and resistance levels. Based on the Fibonacci sequence, it draws horizontal lines at key levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
What is it and what does it show?
Fibonacci retracement levels indicate areas where the price may reverse. They are drawn from a high point to a low point (or vice versa), showing potential retracements before continuing the original trend. These levels derive from mathematical properties: for example, the ratio of a number to the next tends to 0.618, hence the 61.8% level.
How to trade with Fibonacci?
1. Identification of supports and resistances:
A retracement level can act as support in a decline or resistance in an uptrend.
Example: If a crypto rises from $10 to $15 and retraces, the 50% level would be $12.50, a possible support.
2. Stop-loss configuration:
Traders can place their stops near Fibonacci levels to reduce risk.
Example: If entering at 38.2%, a stop-loss can be placed just below 50%.
3. Setting price targets:
If the price bounces at a level, the next can serve as a target.
Example: If there is support at 50% and the price rises, 38.2% can be the target.
4. Combination with other tools:
It is recommended to use Fibonacci alongside moving averages, trend lines, and other indicators to improve accuracy.
While this tool is useful, it does not guarantee success. Proper risk management and complementary analysis are essential for making informed decisions.
