Fibonacci Retracement Level

What Is a Fibonacci Retracement Level?

Developed by Leonardo Fibonacci in 1170 AD, Fibonacci ratios represent a set of key numbers known as Fibonacci retracement levels. These levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

Horizontal lines are drawn to represent Fibonacci retracement levels, which indicate support and resistance levels. Each level corresponds to a specific ratio or percentage. These levels show how much the price has retraced from a previous movement, with the expectation that the prior trend will continue.

How to Use Fibonacci Retracement?

The Fibonacci sequence is a pattern of numbers that starts with 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on. Each number in the sequence is the sum of the two previous numbers, and each number is approximately 1.618 times greater than the previous number. Fibonacci ratios are calculated by dividing the numbers in the Fibonacci sequence. For example, the ratio of 61.8% is calculated by dividing 21 by 34 or dividing 55 by 89. These ratios are used to identify the price momentum of an asset in the financial markets. Traders use Fibonacci retracements to draw support lines, visualize resistance levels, set stop-loss orders, and determine take-profit targets.

How to Draw Fibonacci Retracement?

Most traders use Fibonacci retracements on a 1D chart to identify the long-term trend of an asset. These retracements also help traders identify resistance levels, support lines, stop-loss targets, and entry levels.

In the chart above, the Fibonacci retracement is drawn from the lowest point on the 1-day chart of Bitcoin (BTC) to its highest point. The Fibonacci ratios can be seen on the left-hand side along with support lines. BTC broke the 0.65 ratios, also known as the ‘golden pocket’, and then moved up to the 0.382 level. When it broke that level, 0.382 became its support and it consolidated for a few days before breaking the 0.236 lines on the Fibonacci retracement chart.

What Is the Best Setting for Fibonacci Ratios?

Different traders use different ratios, but the most common Fibonacci ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

Like any other technical indicator, Fibonacci retracements have some limitations. One disadvantage is that this indicator is not objective and works well only for certain assets. For Fibonacci retracement to be effective, a significant number of traders must use the same Fibonacci ratios. Therefore, it is advised to use other technical indicators in conjunction with Fibonacci retracements, such as the relative strength index (RSI), Moving Average Convergence Divergence (MACD), on-balance volume (OBV indicator), Aroon indicator, and the stochastic oscillator.