The Fibonacci sequence is one of the most popular technical analysis tools in the investment community. It is known to many investors in the field of cryptocurrency investment. Fibonacci is widely used to predict market trends. In this article, let’s learn about the concept of Trading Fibonacci with Forex Trading. At the same time, instructions on how to apply it in analyzing the cryptocurrency market.
What is Fibonacci in forex?
The Fibonacci Trading Sequence is also known as the Fibonacci Sequence. This series of numbers attracted the attention of many other mathematicians later. After that, they conducted many experiments and found similar results.
The Fibonacci sequence usually starts with the familiar first two digits 0 and 1. Or it can be 1 and 1. This is the basic Fibonacci formula
Trading Fibonacci is a series of natural numbers. It was the basis for an important discovery. That is the relationship with the golden number (𝛗) – the symbol for the golden ratio. The golden number is the ratio between two parts of a line segment that satisfies the ratio between the large part and the entire line segment equal to the ratio between the large part and the small part. This is also how Fibonacci Trading is formed.
In nature, this ratio is very common. We can see this ratio recognized in many types of structures. For example, flowers, leaves, human body organization, and many other things.
Classification of Fibonacci Trading Patterns
As mentioned earlier, there are two main forms of Fibonacci Trading. Now, let’s explore how to apply them to charts for better understanding!
Fibonacci Retracement
Based on the Fibonacci levels (point B), we have the ability to determine the reversal level of the chart. In applying this model, traders need to identify the price at the peak of the trend. It will then look for support prices based on the Fibonacci ratios. Typically, there are four basic types of ratios that investors often use in this model. For example: 23.6%; 38.2%; 61.8%; 78.6%.
However, applying Fibonacci Trading independently is not easy. Traders often combine the Fibonacci sequence with other tools. The purpose is to ensure more accuracy in trend assessment. Like trendlines, support and resistance, and many more tools. Usually, when Fibonacci Trading levels coincide with support and resistance zones. There is a high probability that the price will retest or turn around from there.
See more: Profession forex trade thanks to Fibonacci applying
Fibonacci Expansion
Different from the Fibonacci retracement trading model, the Fibonacci extension only focuses on the most important ratios. That is 161.8%. The purpose of this is to locate the price level at which the chart can “bounce”. By using Trading Fibonacci Expansion, investors can predict how far the trend may move.
Similar to Fibonacci Retracement, using Fibonacci Extension to make decisions is not always easy. Sometimes you may have difficulty making the smartest decisions. In practice, support or resistance with a more certain ratio is preferable.
Drawing the Fibonacci indicator on Trading View effectively
Trading Fibonacci Retracement helps traders identify potential price levels for reversals in the market. This is especially useful when you want to determine entry and profit points in a trade. Let’s learn how to draw the Fibonacci Retracement sequence and use it effectively.
Instructions for drawing the Fibonacci retracement indicator
Fibonacci retracement is a tool that helps determine the stopping point of temporary fluctuations. From there, it helps decide when to enter an order. When using the Fibonacci retracement sequence, it is important to follow the steps below. The purpose is to ensure the entry point is optimal and the risk is minimal.
Step 1: Search for the Fibonacci retracement tool
Not just Tradingview, but whether you use other platforms, no need to worry. This function often appears on many different interfaces.
Step 2: Calculate and choose the right time to draw the Fibonacci retracement
This is important, it is not always a good idea to plot the time frame on the chart. This depends on your understanding and solid trading experience.
In this step, the basic things you need to remember are:
- Volatility in large time frames often affects smaller time frames. For example, if you see an uptrend in the 4-hour timeframe. However, the trend is down on the daily time frame. If you only rely on the 4-hour time frame to use the Fibonacci Retracement to determine your buy point. You may have to cut losses sooner than expected. This is true!
- Use large time frames (like D1, D3, etc.) to identify the main trend. Then apply Fibonacci retracement on smaller timeframes (like H4, H1, etc.). Mainly to locate retracement points and enter orders. For example, you predict that tomorrow’s D1 candle will be green. But instead of opening an order immediately, you should “zoom in” that D1 candle on the H1 or H4 frame. At the same time, apply Fibonacci retracement to determine the entry point.
- Waiting time for order execution will vary depending on the timeframe you use. For example, if you apply Fibonacci retracement on the D1 timeframe. Therefore, it is not possible to just wait one day for the order to match. If you use Fibonacci retracement on the H1 timeframe and after a day of unplanned volatility. At that time, you should consider adjusting your plan instead of continuing to wait.
Step 3: Determine the lowest and highest price
You must clearly understand that large time frames often dominate small time frames. If you misunderstand step 2, moving on to step 3 will not yield meaningful results. It can even be harmful.
For example, in this situation, you observe an uptrend in ETH that lasts over several days. You predict that this trend will continue. However, instead of opening an order immediately when you see the price increase. You proceed to mark the Trading Fibonacci retracement levels carefully. This helps you wait for the price to return to a more ideal level before deciding to open an order.
Calling the highest price the “peak” and the lowest price the “bottom” is just a relative perspective. Because the price will not always return after reaching a peak or bottom. Besides, it can continue to increase or decrease. This is a matter of probability that you need to accept when entering a transaction.
Step 4: Drag from the lowest price to the highest price
Use the Trading Fibonacci Retracement tool to pull from the lowest price to the highest price
It doesn’t matter much whether you drag the Fibonacci sequence from low to high or from high to low. The important thing is the symmetry of the Fibonacci retracement through the 0.5 Fibo level.
Continuing the step 3 example, you will draw the Fibonacci Retracement from the lowest level to the highest level. Then we will proceed to step 5.
Step 5: Locate price zones to buy back and wait.
After you have drawn the Fibonacci retracement sequence on the price line. Everything will become clearer and help you plan effectively. If the price has a retracement from the high, the potential buyback point will be at the Trading Fibonacci levels :
- 0.618
- 0.5
- 0.382
The 0.618 level in Trading Fibonacci is the point that many traders expect the most. In the Fibonacci sequence as explained above. This level is also known as the Fibonacci golden ratio. However, in real trading, the results are not always as expected.
However, you can choose one of those Fibonacci Trading levels to open an order. Or divide your capital into small parts and open orders at each level. This is also a wise plan. As long as we are always willing to cut losses if the price does not go according to plan. And so, we’ll move on to step 6.
Step 6: Cut losses if the price moves out of the plan
Wait for the order matching time to arrive. Then, be ready to execute stop losses if the price moves out of plan.
For clarity, it should be emphasized that this measure is only relative. And not an absolute “holy grail”. Therefore, you must have a suitable plan to cut losses. (Could be a stop loss based on % or when the price breaks the Fibonacci Trading level ).
However, sometimes there are situations like in this example when everything goes great.
As you can see, instead of falling into a FOMO mood and buying right when the price is at the “peak”. It is easy to stop losses, using Fibonacci Retracement will help you have a significantly better entry point.
Often, after successfully applying Trading Fibonacci Retracement, people will continue to use the Fibonacci Extension. If Fibonacci Retracement helps determine the entry point, then Fibonacci Extension is used to find the profit-taking point.
Instructions for drawing the extended Fibonacci sequence
Step 1: Access the extended Fibonacci drawing tool on the TradingView platform.
Step 2: Specify the time frame you want to use to draw the Fibonacci extension.
Step 3: Determine the highest price, lowest price, and retracement price within the selected time frame.
This step adds price, which is the price that was rolled back. This helps determine:
- The highest peak
- Lowest bottom
- Price levels have recovered
Step 4: Draw the Fibonacci extension in the sequence: Low price -> High price -> Retracement price
In this case, it is important to pay attention to the drawing direction.
- When you expect the price to continue to increase, you should draw it in the following order: low price -> high price -> pullback price.
- If as predicted, the price will still tend to decrease. Draw in the following order: from highest price to lowest price. After that, the price was restored.
Step 5: Control greed, take profits consciously, and do not wait for maximum expectations. With the level, Fibo 1.618. This is the highest Fibonacci Trading level that every trader expects.
You also know that waiting for the highest price is not always possible. The best advice is to take profits gradually. For example, you can take profit on 1/3 and then continue to take profit on the remaining 1/3. And continue at different Fibonacci extension levels, like 0.768, 1, 1.618, etc.
See more: Optimize trading with IC Markets Exchange
Things to keep in mind when Trading Fibonacci
Here are the important things you need to remember when trading and when using Fibonacci:
- Trading Fibonacci is a measurement tool, not a price prediction tool. This means you have predicted the trend before. You then use Fibonacci to measure and determine the potential of that prediction. Therefore, the use of Fibonacci cannot guarantee accurate predictions of price trends.
- When you predict the price trend wrongly, applying Fibonacci Trading becomes ineffective. Therefore, this tool is often used to optimize entry points and profit-taking points. Experts recommend that you combine Elliott Waves and Fibonacci when trading
- This is a simple and convenient tool, so you should use it regularly.
- Always have a plan to cut losses when the market doesn’t go according to your plan. Price can break all Fibonacci levels in just one day, even in just a few hours. Volatility in the cryptocurrency market is often very strong.
Conclude
The above article has shared basic knowledge about Fibonacci Trading. It is an indispensable tool if you want to succeed in the cryptocurrency market. Similar to other tools, using Fibonacci levels will make it easier for investors. Especially in making trading decisions. However, the accuracy and results of trading are only relative. Besides, it all depends on the experience and knowledge of each investor. That is the knowledge Forex Trading wants to bring to you about Fibonacci Trading.
Frequently asked questions about Trading Fibonacci
How are Fibonacci retracements and Fibonacci extensions different?
Trading Fibonacci retracement is used to measure the correction of a trend. While the Fibonacci extension is used. The purpose is to predict the next levels the price reaches after a correction or reversal.
How to use Fibonacci in determining entry and exit points?
Fibonacci is used to determine potential support and resistance levels. Also, place orders based on its combination with other patterns and indicators.
How reliable is Fibonacci in market prediction and entry points?
The reliability of Fibonacci Trading depends on how you apply it and the specific market conditions. In some cases, Fibonacci levels can provide reliable support and resistance. While in some other cases, they may not react as expected.
