In crypto trading, Fibonacci retracement is a technical analysis tool used to identify potential support and resistance levels based on the Fibonacci sequence. The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on.
Fibonacci retracement levels are drawn by connecting a high point to a low point in an asset’s price trend and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. These ratios represent potential levels of support and resistance where traders may expect the price of the asset to bounce or reverse.
Traders often use Fibonacci retracements to identify potential entry and exit points for trades. For example, if the price of an asset is trending upward and retraces to the 61.8% Fibonacci level, it may be an indication that the asset is finding support at that level and could continue to trend upward. Conversely, if the price of an asset is trending downward and retraces to the 38.2% Fibonacci level, it may be an indication that the asset is facing resistance at that level and could continue to trend downward.
Fibonacci retracements are not infallible and can sometimes generate false signals, so traders should exercise appropriate risk management strategies when using them. It’s also important to note that the Fibonacci retracement levels are not a guarantee of future price movement, but rather a tool that can help traders make informed trading decisions.