Looking for a straightforward Fibonacci retracement definition? Check out this concise guide to get to know what this term means!
What Is Fibonacci Retracement?
Fibonacci retracement in crypto refers to a technical analysis tool used as a means of identifying the potential levels of support and resistance in the price of a cryptocurrency.
What You Need To Know About Fibonacci Retracement
Fibonacci retracement levels derive from the famous sequence of numbers discovered by Leonardo Fibonacci in the 13th century. They are represented as horizontal lines that signify the probable levels of support and resistance, which can be used by traders to determine potential entry and exit points for their trades.
These Fibonacci retracement levels are linked to specific percentages ( 23.6%, 38.2%, 50%, 61.8%, and 78.6%), which indicate the extent to which the price has retraced from a previous move.
Suppose you want to determine potential levels of support and resistance for your trades in Bitcoin. First, identify the highest and lowest points on the chart during a specific time frame. Next, divide the vertical distance between them by the key Fibonacci ratios to determine the retracement levels.
For instance, if the price of Bitcoin has increased from $30,000 to $60,000, and then retraced back to $50,000, the Fibonacci retracement tool would determine the following:
- 23.6%: $56,000 = $60,000 – (0.236 * ($60,000-$30,000))
- 38.2%: $54,400 = $60,000 – (0.382 * ($60,000-$30,000))
- 50%: $52,500 = $60,000 – (0.5 * ($60,000-$30,000))
- 61.8%: $50,700 = $60,000 – (0.618 * ($60,000-$30,000))
- 100%: $30,000
Thus, if BTC’s price reaches the 23.6% retracement level at $56,000, it may be a good time to enter a long position. However, if the price reaches the 61.8% retracement level at $50,000, it may be best to exit a long position.
Note that Fibonacci retracement levels are not a guarantee of future price movement, but rather a useful tool to assist in decision making.
