How to Properly Use the Fibonacci Retracement Tool

3 ene 2021

I've recently come across a lot of posts where the fibonacci retracement tool was erroneously used, and this gave me a good idea for an educational post.

Introduction: The Fibonacci Sequence
- Before talking about fibonacci retracements, it's important to understand what fibonacci sequences are.
- Fibonacci sequences are numbers that are equal to the sum of the preceding two numbers, starting with 0 and 1.
- So a fibonacci sequence would look like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on.
- The fibonacci sequence is also known as nature's code, as these numbers are commonly found among nature as well. The number of petals of flowers is a prime example.

The Fibonacci Ratio
- The fibonacci ratio is derived by dividing the numbers within the fibonacci sequence
- The 0.618 (61.8%) for instance, is approximately the value when we divide 21 by 34, and 55 by 89
- The 0.382 (38.2%) ratio is calculated by dividing a number by another number located two spots to the right.
- The 0.236 (23.6%) is calculated by dividing a number by another one three spots to the right.
- Just like the fibonacci sequence, fibonacci ratios are commonly found in nature as well, through flowers, galaxy formations, and spirals on shells

Fibonacci Retracement
- The fibonacci retracement is a tool in which horizontal lines are drawn to help traders identify support and resistance
- These horizontal lines are based on the fibonacci ratios
- Interestingly enough, just as the fibonacci ratios are commonly found in nature, they are also found in the market, reflected by charts
- A fibonacci retracement can be identified by connecting the swing high to the swing low of a downtrend, and the swing low to swing high of an uptrend
- The connection between the high and low points are where most traders get confused.

Application
- On the left hand chart, we can see that the swing high has been connected with the swing low
- As a result, we could identify possible resistance levels for Bitcoin's bullrun in 2019.
- Prices touched the 0.618 fib resistance level , and eventually attempted to break the 0.5 fib, but failed
- We can also see that the 0.382 and 0.786 levels played a key role as support and resistance
- On the right hand chart, we can see the swing low connected to the swing high
- Based on the fib levels of this retracement, we could identify strong support at the 0.786 level, around 4k.

Conclusion
The fibonacci retracement tool can be a very effective way to identify areas of support and resistance , but they need to be applied correctly. Don't forget to connect the swing highs and lows based on the trend!

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