Fibonacci AKA was one of the greatest mathematicians who ever lived. He’s famous for defining a mathematical pattern known as the Fibonacci Sequence. Without getting too deep into the weeds, the ratios derived, from the Fibonacci sequence can be found everywhere, namely in music and in nature.
Fibonacci actually, ratios can be found in things like the shape of a Pine Cone. And even the family tree of honeybees.
Traders who use the Fibonacci indicator belief that the different levels on the indicator are natural levels of support and resistance. While this may seem a bit arbitrary many traders, swear by it and many of you have probably seen it being used by some of your favorite crypto personalities that. You might not find the Fibonacci indicator on your favorite crypto exchanges and we’ll have to go directly to the tradingview website to access it.
What is the Fibonacci Retracement Indicator used for. Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. They’re used to estimate the best time to buy or sell an asset since each level of the Fibonacci indicator functions as support and resistance. The indicator is useful because it can be drawn between any two significant price points, such as a high and a low. The indicator will then create the levels between those two points.
To use the Fibonacci indicator effectively you need to identify two points on the candlestick chart called the Swing High and Swing Low.
The swing High Point is where you see an obvious change in a price trend from bullish to bearish. The swing low point is where you see an obvious reversal from bearish to bullish.
Once you’ve identified these two points, you draw the Fibonacci indicator between the swing low and the swing high. If you’re trying to see how low the price will fall and you draw the Fibonacci indicator between the swing high and swing low. If you’re trying to see how high the price will rise.
You’ll see a series of lines containing Fibonacci ratios. You might be surprised at just how nicely price action seems to cluster around these lines. As a general rule of thumb, the 0.5 line on the Fibonacci indicator is considered to be one of the strongest levels of support or resistance. Why? Because maths, that’s why this means that if you draw your Fibonacci indicator and see the price start to drop significantly below, the 0.5 line. you might be into some hurt. Likewise if you see the price start to rise up near that 0.5 line, it’s probably a good time to sell.
Furthermore, the Fibonacci sequence can be utilized after the market establishes a breakout. Fibonacci retracement levels can be used to get in on the trend with Fibonacci extension levels used to identify where the trend may end up fizzling out.
It is important to place accurate Stop-Loss and Take-Profit orders to mitigate the risk and maximize profits. In this strategy, stop-loss is placed just below the 61.8% Fib level. If the price breaks this Fib level, the uptrend gets invalidated, and we can expect the beginning of a downtrend.
We can place the take-profit order at the nearest’ high’ of the uptrend and trail the stop-loss until it is triggered. The minimum risk to reward of this trade is 1:1, which is not bad. But since it is a continuation of the trend, we can wait until it makes a new high and take profits there. This will result in a 1:2 risk to reward trade.
Below is how the setup of the final trade looks like.
Fibonacci retracements are a part of the trend trading strategy that most traders observe during an uptrend. Traders try to make low-risk entries in the direction of the trend using these Fibonacci levels. It is believed that the price is highly likely to bounce from the Fibonacci levels back in the direction of the initial trend. These Fib levels can also be used on multiple time frames. When this tool is combined with other technical indicators, we can predict the outcome of the trade with a greater degree of accuracy.
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