Fibonacci retracements are a common mathematical tool used when trading to predict resistance and support levels. They operate under the principle that markets retrace a predictable amount before continuing in the direction of the long-term trend.
Easy to use and built into many trading chart analysis apps, like Bitcoinwisdom, understanding and using Fibonacci retracements can make you a better and more profitable Bitcoin trader.
In order to do a Fibonacci retracement, you find Bitcoin’s lowest price and highest price during a set period of time, known as swing low and swing high. To find support levels, the swing low is clicked on, and then you click on the swing high, and the software generates support levels. This is done by taking the distance between the swing low and swing high and dividing it by numbers in the Fibonacci sequence, yielding 100%, 78.6%, 61.8%, 50%, 38.2%, 23.6%, and 0% support levels. When viewing Bitcoin price data with these support levels overlaid, they are remarkably accurate and temporarily act as support levels for Bitcoin’s price.
The Fibonacci sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on and so forth. The pattern is that each number is the sum of the two previous numbers. The sequence is related to the golden ratio and appears throughout nature since it is a mathematical approximation of fractals.
Essentially, with the Fibonacci sequence, the long-term Bitcoin price trend can be broken down into smaller price movements, since the sequence can be used to elucidate the fractal nature of Bitcoin price movements. Bitcoin’s price movement is comprised of a series of smaller and bigger waves overlaid on each other, and Fibonacci retracements approximate how much the price will move from those waves.
In order to find resistance levels, the swing high is connected to the swing low, and the Fibonacci retracement software shows levels that Bitcoin’s price has a hard time breaking through, with remarkable accuracy. Resistance levels are somewhat of an inverse of the support levels, with the 100% support level at the bottom of the chart having 0% resistance.
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