In the world of technical analysis, there are hundreds of distinct indicators and tools at our disposal. These instruments help identify potentially important price ranges on a chart by means of support and resistance, supply and demand, moving averages, etc. However, the market can be unpredictable, and since each given indication is merely a hypothesis, it’s best if these resources are used together to further support a trader’s analysis.

Among the most favored indicators, lies the Fibonacci Retracement tool. Italian mathematician Leonardo Bogollo Pisano (famously known as Leonardo Fibonacci) designed this instrument utilizing ratios from another system consisting of a unique sequence of numbers. Retracements are reverse movements in the opposite direction of a current trend, these Fibonacci ratios project the depth to which a price has retraced from a peak or downward spiral. We’ll take a look at Fibonacci’s ratios and the numerical sequence used to identify them.

Fibonacci Sequence

First, it’s important to understand that Fib’s ratios range from 100% to 0% with 50% being in the middle (obviously). It’s the ratios within that broad spectrum that are determined by the characters in Fib’s series of characters; once applied to two significant price points on a chart, like a high and a low, these ratios will identify price points in which market sentiment is likely to flip. Despite the title, Fibonacci’s sequence was first constructed in ancient India by mathematician Acarya Virahanka. The numbers infinitely align as follows: 0,1,1,2,3,5,8,13,21,34,55,89,144, etc. As you can see, each number (apart from the first two) is the sum of the two preceding numbers, and the relationship between them approximates the Golden Ratio.

Fibonacci Ratios

Fibonacci ratios derive from dividing numbers within the sequence by each other. These ratios are used as percentages on Fibonacci indicators. The first percentage of the ratios is 23.6%, which is the average estimate when dividing a number in the sequence by a number placed three spots to the right (eg: 8÷34=0.23529; 34÷144=0.23611111). The second percentage that follows is 38.2%, which is the estimated difference when dividing a number by a character two spots to the right (eg: 55÷144=0.38194). The next percentage that follows is the halfway point standing at 50%, and before we hit the final mark at 100%, the preceding spot lies at 61.8%, which can be found by dividing one sequence character by the number that comes after. Fibonacci Retracements

Retracement points are calculated after recognizing two crucial points on a chart and drawing a line between them. After the line is created, horizontal lines appear on the screen representing percentages from which the price can move from the initial detour.

Looking at the illustration above, we can see the price of Bitcoin skyrocketed from around 51,000 to just about 69,000. Within those two ranges, our retracement indicator points out areas in which the currency price briefly changes its trajectory before continuing in the upward direction. Retracement tools can be used to identify support and resistance areas, place orders to automatically buy or sell tokens at particular percentages, and help counter-trend traders capitalize off temporary pull backs. When using retracements with other instruments like moving averages, which can indicate a trend continuation or reversal, both tools can further support a prediction regarding the market’s next move.

If we look at the picture above, we can see that the blue moving average (20-period simple moving average) is slightly above the 0.618 retracement level which has already been acting as a resistance barrier. With the 20-day EMA crossing below that spot, that retracement level is now likely to remain a resistance zone and as we can see, the price is currently consolidating below it. If you are looking to trade this setup, then this confluence would be the most important zone on the chart.

As mentioned earlier, these calculations are only educated guesses, you are not advised to rely solely on Fibonacci retracements or any indicator for that matter. Using multiple indicators simultaneously is similar to consensus in a blockchain; the more support around a claim, the more valid it’s likely to be.

Other Fibonacci Instruments

Using the underlying Fibonacci principles (ratios and sequence), support and resistance can be found through other means aside from retracements; NewsCrypto offers access to Fibonacci timezones, fans, and arcs as well on the Charts section of the NewsCrypto platform. Each calculation is based on the distance between two starting points, in which segments are formed deriving from fib sequences and/or ratios.