> Blog > How to Use Fibonacci Retracement in Crypto

Published September 8, 2022

Reading time 5min


Leonardo Bonacci or Leonardo Pisano, commonly known as Fibonacci, was an Italian mathematician in the 12th century who discovered a sequence of numbers that seemed to occur naturally throughout countless facets of the world, from the growth of animal populations to the shape of a nautilus shell. 

Occurring in both nature and man-made instances, the Fibonacci sequence has been applied to a wide range of fields, from music composition to computer programming, and even cryptocurrency trading as well. 

So what is the illustrious Fibonacci sequence and why does it apply to crypto trading? This article will explain what Fibonacci retracement means in crypto and how some traders are using Fibonacci retracement to plot their next moves. 

What is Fibonacci?

fibonacci retracement levels

The Fibonacci sequence is a series of numbers in which each subsequent number is the sum of the previous two. The sequence starts off like this: 0, 1, 1, 2, 3, 5, 8, 13 and so on. 

While it might not seem like much at first glance, the Fibonacci sequence appears in nature quite often. For example, the sequence can be seen in the way a honeybee constructs its hive, with each subsequent layer of wax comb being slightly wider than the one below it. 

The Fibonacci sequence is also found in the spirals of a nautilus shell, as well as in the arrangement of the bristles of a pinecone. But why does this sequence of numbers have such a ubiquitous presence in nature? 

Mathematicians have found that the Fibonacci sequence occurs in a variety of settings because it optimizes space and efficiency. In the case of the honeybee hive, for example, using a Fibonacci spiral allows the bees to pack more comb into a smaller area. For the pinecone, the Fibonacci arrangement of bristles allows each individual bristle to receive the maximum amount of sunlight in the smallest possible space. 

If you’ve ever taken an art composition or photography class, you’ve probably also heard of the “golden ratio.” This is a number that appears often in nature and in works of art, and it’s also related to the Fibonacci sequence. 

The golden ratio is equal to approximately 1.618, and it can be derived by taking any two consecutive numbers in the Fibonacci sequence and dividing the larger number by the smaller number. For example, if we take 13 and divide it by 8, we get 1.625. If we take 21 and divide it by 13, we get 1.615. And so on. 

The Fibonacci sequence and the golden ratio appear in a variety of settings, from the Parthenon in Greece to Leonardo da Vinci’s Mona Lisa. And as it turns out, they also have some applications in the world of cryptocurrency trading as well. 

How Fibonacci Relates to Crypto Trading

As we saw with the honeycomb and pinecone examples, the Fibonacci sequence can be used to optimize space and efficiency. When applied to trading, traders use the Fibonacci sequence to help identify trends and make better-informed decisions about when to enter and exit trades. 

One way that traders use Fibonacci is by looking at what are known as “Fibonacci retracement levels.” These are horizontal lines that are drawn on a chart at specific Fibonacci levels. The most commonly used Fibonacci retracement levels are 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. 

You can derive these percentages from the Fibonacci sequence by taking any two successive numbers and dividing the smaller one by the larger one. For example, if we take the Fibonacci numbers 8 and 13, we get 8/13 = 0.615, which is close to 61.8%. 

Traders will look at historical price data to try to identify trends. Once they identify a trend, traders can then use Fibonacci retracement levels to try to predict where the price is likely to go next. 

For example, let’s say that a trader identifies a downtrend in the price of bitcoin. The trader could then use Fibonacci retracement levels to try to estimate how far the price is likely to fall before it bottoms out. 

The trader might believe that the price is likely to fall to the 23.6% Fibonacci retracement level, or even further, to the 38.2% or 50% Fibonacci retracement levels. Once reaching these levels, the trader may begin to build an entry there in anticipation for a reversal to the upside. 

Of course, there’s no guarantee that the price will actually reach any of these Fibonacci levels. But by using Fibonacci retracement levels, traders can get a better sense of where the price may go and establish a framework for when to buy and sell. 

Fibonacci Retracement Levels 

There are five main Fibonacci retracement levels in trading: 23.6%, 38.2%, 50%, 61.8%, and 100%. Each of these levels is derived from a different Fibonacci number in the sequence. 

The 23.6% level is derived from the number 0.236, which you get when you divide a number by another three places higher. The 38.2% level is derived from the number 0.382, which you get when you divide a number by one two places higher. 

The 50% level is simply derived from the number 0.5, as it is halfway between 0 and 1. The 61.8% level is derived from the number 0.618, which you get by dividing a number by the next highest number. Lastly, the 100% level is derived from the number 1. 

So what do these numbers mean for traders? 

The 23.6%, 38.2%, and 61.8% Fibonacci retracement levels are considered to be important levels by many traders. These levels are often used as potential support or resistance levels, depending on the direction of the trend. 

The 50% level is also sometimes used as a potential support or resistance level. However, it is not considered to be as important as the 23.6%, 38.2%, and 61.8% levels. For example, if the price of bitcoin is in a downtrend, a trader who believes that the price will continue falling could choose the 23.6% Fibonacci retracement level as a potential target. 

The 100% Fibonacci retracement level is not used as often as the other levels, but it can still be important in some cases. For example, if the price of bitcoin falls from $1,000 to $900, and then rebounds to $950, the 50% Fibonacci retracement level would be at $950.  

Calculating Fibonacci Retracement Levels

Calculating Fibonacci retracement levels is relatively simple and only requires a few steps. 

First, you will need to identify the most recent high and low points on the chart. These points will be used to calculate the Fibonacci levels. 

Once you have identified the high and low points, you will need to plot the Fibonacci levels on the chart. This can be done by drawing a horizontal line at the 23.6%, 38.2%, 50%, 61.8%, and 100% levels. Once you have plotted the Fibonacci levels, you will be able to see where the price is likely to find support or resistance, and you can make your trading decisions accordingly. 

fibonacci chart

When to Use the Fibonacci Retracement Tool 

You can use the Fibonacci retracement tool in a variety of different ways, but it is most commonly used to predict support and resistance levels after a price movement. 

Some traders also use Fibonacci retracement levels to help them identify entry and exit points for their trades. However, it is important to note that Fibonacci levels are not infallible and should only be used as a guide.  

A trader who is only using Fibonacci levels to make trading decisions is likely to make poor decisions and will likely lose money, but using Fibonacci levels as a guide may give some indication about when to buy and sell. 

Using Fibonacci Retracement in Crypto

Fibonacci retracement can be a useful tool for traders who are trying to predict market movements, but it is important to remember that Fibonacci levels are not always reliable. 

When using Fibonacci retracement in crypto, it is important to look at the bigger picture and to use other technical indicators to affirm your decisions. If you are only relying on Fibonacci levels alone to make trading decisions, you are likely to make poor decisions that will ultimately lead to losses.  

However, if you use Fibonacci levels as a guide, they may give you some indication about when to buy and sell, and this could help you make more profitable trades.  

To learn more about technical analysis and making more informed trading decisions, check out the FTT DAO Blog. You can stay up-to-date with the latest news and analysis across the blockchain industry by following FTT DAO on Twitter




Join our Community

Join the Discord Server