The Fibonacci Sequence
The Fibonacci sequence is a numerical series in which each subsequent number is the sum of the two previous ones: 0, 1, 1, 2, 3, 5, 8, 13, and so on. The sequence is named after the Italian mathematician Leonardo of Pisa, better known as Fibonacci, who lived in the 12th-13th centuries. He was the first to draw attention to it in the work 'Liber Abaci'.
Calculating Levels
The thing is that adjacent members of the sequence relate to each other. For example, if you start dividing each previous number in the chain by the next one, you can notice that the quotient will tend to 0.618. Conversely, if you look for how many times the next number is greater than the previous one, the result will tend to 1.618.
Other coefficients are calculated similarly to the given numbers. For example, if you start dividing the current number by the one that is two places away, you get 0.382, and if it is three places away, you get 0.236. In the end, you get another sequence: 0, 0.236, 0.382, 0.618, 0.764, 1, 1.618 (percentage representation is also permissible). These figures are the basis for constructing support levels if we are talking about values below one, and resistance if above.
Construction of Levels
To construct these levels on cryptocurrency charts, it is necessary to define two points: the beginning and the end of the trend. These can be both local extremes and global ones. Next, you should calculate the difference between the maximum and minimum, and then multiply it by the corresponding coefficients. The levels are then drawn based on the obtained values.
However, in practice, this is not necessary — in any modern trading terminal, Fibonacci levels can be drawn automatically. The only thing you will have to do manually is to determine from which points to draw them. Given that most services are in English, the tool is most often referred to as Fibonacci retracement.
Let's consider how Fibonacci levels work on the Bitcoin chart. On the monthly timeframe, it is visible that from November 2022 to January 2025, BTC rose, and then a correction began. Therefore, you can take November 2022 as the starting point and January 2025 as the end of the trend.
As can be seen from the candlestick chart below, Bitcoin has almost reached the 0.382 level. If it manages to hold above this level, a rise is quite likely. It is also worth paying attention to the 0.618 level — a minimum of the previous correction was formed in its vicinity in August 2024.
Disadvantages of Fibonacci Levels
The first drawback is the necessity to wait for the end of the rise or fall. As long as the price movement is not finished, constructing levels is impossible. The second drawback is the subjectivity of evaluation. What some consider to be the end of the rise, others may simply ignore. The third downside of Fibonacci levels is that they serve only as a guideline for buying or selling and do not provide any guarantees. For example, on the same monthly chart of Bitcoin, nothing happened near the 0.236 correction level, and BTC continued to fall.
Real Use of Fibonacci Levels
What should be done to increase the effectiveness of using Fibonacci levels? First and foremost, it is important to remember that the decision made may be incorrect. One should not blindly believe that the points for constructing Fibonacci levels are defined correctly. A good way out of the situation would be to look at the signals provided by external trading indicators: RSI, MACD, Stochastic, and others. Fibonacci levels will gain even more significance if they coincide with important psychological or historical marks.
Conclusion
Fibonacci levels allow traders to identify areas on charts where a trend reversal is expected. They are based on a mathematical sequence first described by Leonardo of Pisa.
This material and the information contained therein do not constitute individual or any other investment recommendation. The editorial opinion may not coincide with the opinions of analytical portals and experts.
