November 28, 2024 Welcome back to our blog, where we aim to equip traders and investors with the information they need to understand the world of cryptos and how to master the markets with our wide range of advanced crypto bots.
Today’s agenda will continue our rundown of advanced technical analysis with one of the most valuable indicators for daily crypto traders, Fibonacci retracements.
As usual, we’ll cover everything you need to know about this unique form of chart analysis. We will start by reviewing Fibonacci’s history, logic, and two underlying concepts: the Fibonacci sequence and the golden ratio. Then, we’ll explore how this theory relates to chart patterns and technical analysis, emphasizing how it can help us optimize the settings of our automated trading strategies.
Along with a handful of valuable tips and practical advice, you’ll have another excellent method in your toolbox for evaluating the markets, setting up more accurate stop-losses and take-profits goals, and becoming a more knowledgeable, educated, and profitable crypto trader.
Before we move forward with our busy itinerary for today, we want to remind our readers that the information presented in this blog post is intended solely for educational purposes and should not be considered a call to action or any other kind of financial advice. Traders must consider their financial status, trading goals, and risk tolerance before employing any crypto trading strategy. Crypto trading involves inherited risks; consulting with a qualified financial advisor before making investment decisions is highly recommended.
The story behind the Fibonacci analysis is incomparable to any other technical indicator. That is because, unlike other standard tools for analyzing chart patterns, its origin has nothing to do with the worlds of economics, finance, or investments whatsoever.
Leonardo Pisano, most commonly known as Fibonacci, was an Italian mathematician who lived around 1170 – 1250. As the son of a wealthy merchant, his childhood consisted of traveling across the Arab world, where he learned math from the best scholars in the region. Later, he documented his studies in the famous book “Liber Abaci” (The Book of Calculation) around 1202. This was the first introduction of many mathematical concepts to the Western world, most notably the Arab-Hindu numeric system we all use today (as opposed to the Roman digits that were popular at the time).
Without getting too sidetracked in ancient history, let us focus on what is relevant to traders in his book. He presented a unique series of numbers now known as the Fibonacci sequence.
In simple terms, the Fibonacci sequence is a series of numbers where each number is generated by adding up the sum of its two preceding numbers. Starting with 0 and 1, the Fibonacci sequence can be calculated until infinity:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144,233,377,610,987, 1597, 2584, 4181, 6765, 10946, and so on.
What is unique about this set of numbers is that when we transform them into geometry, we often see their pattern occur spontaneously throughout nature. A very partial list of examples can be found when looking at the shapes of pineapples, sunflowers, pinecones, snail shells, pangolins, human fingerprints, and much more.
While there is plenty of evidence for charts and financial markets’ tendency to display similar patterns that align with the Fibonacci sequence, the reason remains unclear.
The golden ratio is the proportion between two consecutive numbers on the Fibonacci sequence.
Interestingly enough, the root of the golden ratio dates back to ancient Greece before Fibonacci’s birth. Back then, it was also referred to as the “divine proportion” due to its aesthetic properties in the arts, architecture, and the previous examples we mentioned.
The numeric value of the golden ratio is approximately 1.618. By chance, this is roughly the same ratio between any two numbers that follow one another on the Fibonacci sequence. The bigger the two numbers, the closer the ratio to the actual golden ratio.
As we mentioned earlier, one of the most unexpected things about the Fibonacci sequence is that we find trails of it almost everywhere. The Fibonacci sequence and the golden ratio can describe many shapes, structures, and patterns in our surroundings.
Surprisingly, many technical analysis experts suggest that, in many cases, asset price action tends to follow the same Fibonacci patterns. On the TradingView platform, for example, there is a whole designated menu of Fibonacci tools. This can be easily found in the top left corner of the screen when opening a price chart under “Gann and Fibonacci tools.”
When we review charts through the eyes of Fibonacci, we are trying to identify potential support and resistance levels in the market. As you may recall from one of our more recent blog posts about the basics of technical analysis, these levels often serve as reversal points where prices are likely to change their direction swiftly.
In Fibonacci analysis, we use different golden ratio variations to predict future market behavior. Without boring you with specific calculations behind every one of them, these are the central values we’ll be using:
· 23.6%
· 38.2%
· 50%
· 61.8%
· 78.6%
· 100%
· 127.2%
· 161.8%
· 200%
· 261.8%
· 423.6%
These crucial price levels are referred to as either retracement levels or extensions, depending on the type of analysis you choose to do and the market conditions at the time of analysis.
Other factors affect which Fibonacci levels will be most relevant for us, such as the specific crypto we choose to trade and the timeframe we focus on in our analysis.
If the information above doesn’t resonate with you, don’t worry; everything will be clear by the end of this blog post.
While everything we’ve covered so far has been informative reading, now it is time to be more practical and understand how to put it to good use in live trading with crypto bots.
This process can be divided into two steps. The first step is to identify the different Fibonacci retracements and expansion levels. Once found, the second step is determining how best to utilize this knowledge in our automated crypto trading strategies.
The first step in using the Fibonacci retracement and extension levels is understanding how to properly place them on the price chart.
To find Fibonacci retracement levels, the first thing to do is identify the chart’s high and low points from left to right. Then, what remains is to draw the primary Fibonacci retracement levels following them.
Finding Fibonacci extension levels follows the same logic. Only this time, in addition to the high and low points, we must identify a third point on the chart, representing the end of the first retraction on the price chart. Like before, after identifying the necessary points, all that remains is to add the same Fibonacci levels to find the expected expansion levels.
While identifying the right points on the chart is up to you, most technical analysis programs, like TradingView, can automatically draw Fibonacci levels without requiring any calculations.
By the end of this process, we should have a price chart with different colors that divide the chart into separate zones. Each zone matches a different Fibonacci retracement or extension level.
Now, let’s take a look at what all of this means for us traders.
The main thing the Fibonacci retracement levels tell us is how low the crypto price is expected to be from its most recent high. In most cases, Fibonacci levels below 100% will provide us with the most relevant potential retracement levels.
In a bullish market, this technical indicator is most commonly used to establish low-risk entry points for long positions. In a bearish market, these levels are often used to determine an entry point for a short position.
In both cases, traders are using this strategy with the anticipation that there is a relatively high probability that prices will bounce back from the retracement levels to the direction of the initial trend.
As many experts suggest, it is always recommended to double-check this trading signal against other technical indicators, such as moving averages or candlestick patterns, to obtain more reliable and accurate results.
On the other hand, Fibonacci extensions attempt to tell us how long the current price movement in the market is expected to last. Most cases, Fibonacci levels above 100% will provide us with the most relevant potential extension levels.
In a bullish market, the extension levels give us potential resistance levels where prices are expected to struggle to advance upward. During a bearish trend, the Fibonacci levels mark potential support levels where prices will likely stop deteriorating.
In crypto trading, these extension levels are typically used to set up stop-losses and take-profit targets for positions that align with the overall market trend (meaning long positions in a bullish market and short positions in a bearish market).
Like other common technical indicators, reviewing the Fibonacci extensions under several different timeframes is always a great way to increase the reliability of our analysis.
After learning the history of the Fibonacci sequence, the golden ratio, the different retracement and extension levels, and how they all relate to technical analysis, now is the time to see how to utilize all of this with the help of our automated trading bots.
The first and most obvious option traders have is to delve into the world of Fibonacci chart analysis and design their trading strategy that follows their logic and predictions on the TradingView platform. As the number one platform for advanced technical analysis, traders can enjoy almost endless options for setting up their Fibonacci trading strategy and adding other technical indicators, like moving averages or MACD, for extra reinforcement.
Once your strategy is up and running, all that’s left is to connect it with our TradingView Bot, which is a straightforward process. Then, everything is set for you to start trading live with your Fibonacci trading strategy.
Regarding our advanced DCA Bots and Grid Bots, the Fibonacci levels are an excellent tool for establishing more accurate trades with clear stop-loss and take-profit targets. This offers crypto traders the potential to make their crypto bots much more efficient and profitable.
For grid trading, a strategy explicitly designed for sideways trends, setting up entries around the 78.6% or 100% retracement levels with profit targets surrounding the 38.2% or 50% extension levels could be an idea worth exploring.
In theory, this setup is ideal for capitalizing on the specific characteristics of a horizontal market. This is because, unlike bullish or bearish markets with clear direction, more significant retracement levels tend to work better in the high-volatility environment of sideways trends. Following the same logic, smaller extension levels might produce better results since reaching new highs or lows is less common.
For DCA trading, a strategy best suited for rising markets, setting up a take-profit goal around the 78.6%—100% level can be interesting since it fits almost perfectly with the chart pattern many bullish trends often display.
Additionally, if you recognize that you opened a trade close to a Fibonacci level, setting a stop-loss target at the level below is an excellent method of mitigating risk without burdening your bottom line. For example, if you noticed that you entered a trade at 61.8%, your stop-loss should be set around 50%.
As a last piece of advice, whichever bot or bots you choose to use, we highly recommend that all of our users verify their trading strategies through our demo account and advanced backtesting features before taking them live.
Fibonacci levels offer crypto traders a reliable method of analyzing charts and predicting future market movement. This can be used to design new trading strategies and optimize already-running crypto bots.
If you haven’t done it yet, we invite you to explore our wide range of trading bots and to learn firsthand how we can help you become more efficient and profitable crypto traders. With a free trial, flexible pricing plans, and other advanced trading tools, our comprehensive trading solutions are worth considering.
