A common tool used by traders to spot price turning points for cryptocurrencies is the Fibonacci retracement levels. Without this tool, traders would engage in Bitcoin trades with little confidence, which could result in needless losses.
The Fibonacci sequence, introduced by an Italian mathematician, appears in both nature and mathematics and is the source of the Fibonacci retracement. When analyzing a price chart to identify probable turning points, traders use them in the stock market. You’ll be surprised to learn that the Fibonacci retracement tool also works incredibly well for cryptocurrency markets, despite being widely used in traditional stock and Forex markets.
Important Fibonacci Retracement Levels
The Fibonacci retracement is applied to a prior trend and is quantified as a percentage. The retracement shows how much of the previous trend is probably going to be reversed before the older trend picks back up. The Fibonacci retracement tool converts the percentage into Bitcoin’s price, identifying where the market may pivot and change trends.
There are four primary retracement levels—23.6 percent, 38.2 percent, 61.8 percent, and 78.6 percent—where a reversal may start. These important Fibonacci ratios may appear to be random numbers, but they are not. They have their roots in an organic number pattern that humans discovered more than 700 years ago.
How to Determine Fibonacci Retracement Levels?
There are multiple examples of Bitcoin prices changing direction close to a Fibonacci retracement level. These examples can be seen in all chart time frames because the market is fractal.
Following a low on August 04, 2021 (A), Bitcoin increased by roughly 40% to complete a trend on the 4-hour chart (B). These price zones, also known as Fibonacci Retracement levels, are formed on the chart when the tool is applied from point A to point B.
On the chart above, Bitcoin starts to consolidate and promptly corrects to the 23.6 percent retracement level before resuming its upward climb to reach the previous high. The following corrective decline takes Bitcoin three times to the 38.2 percent retracement level.
The next level of support for Bitcoin is found close to the 61.8 percent retracement level once it breaks below the 38.2 percent retracement level. Then, its price briefly oscillates between the 61.8 percent and 38.2 percent Fibonacci retracement levels. Bitcoin begins its rise after finding support around the 78.6 percent retracement level, breaking above the 61.8 percent and 38.2 percent levels.
Fibonacci Validation Using Other Technical Indicators
The Fibonacci retracement is a powerful technique on its own. However, there are additional techniques that traders frequently use to amplify these indications. Retracements go well with the use of the Fibonacci extension tool. The tool can be used to estimate how far the present trend might spread. Fibonacci levels work well with candlestick patterns and trend lines. If the price of Bitcoin is about to retrace, look for a candlestick pattern, such the bullish engulfing, to signal the start of a new bull trend.
The tool is not error-free, though. With cryptocurrencies that have a lower market capitalization, this technique is less effective. Moreover, deciding which level is the most appropriate to employ can be challenging.
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