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Expert Guide Using Fibonacci Retracement and Levels

Discussion in 'Expert Level' started by xyzzy, Oct 5, 2017.

  1. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    If you've heard the phrase "fib levels" get thrown around and have no idea what people are talking about, then this guide is for you.

    Fibonacci retracement is a technical analyst's tool for determining where support or resistance levels might lie after a significant price movement. It has it's roots in a mathematical sequence of numbers discovered by Leonardo Fibonacci, which goes like this:

    1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ...

    [​IMG]

    Every number is the sum of the preceding two numbers. What is fascinating is that if you take a number, starting from the beginning, and divide it by the previous number in an iterative fashion going down the sequence, you will approach the ratio 1.618, which is called the golden ratio. This ratio can be found in nature and has been used historically by great artists and architects, commonly thought to be a "divine" number.

    golden-ratio.jpg
    Regardless, the golden ratio has applicability to the behavior of markets, which has led to the development of Fibonacci retracement as another tool for the technical analyst. To use this power of mathematics to your advantage, start by drawing a horizontal line at the highest high in the time frame you are analyzing. This line corresponds to the 100% level. Then draw a horizontal line at the lowest low, and this will correspond to the 0% level. Halfway between is the 50% level. Divide 100% by the golden ratio 1.618, and you get the 61.8% level. Divide 61.8% by the golden ratio again and you get the 38.2% levels. Additional levels are drawn sometimes at 78.6% and 23.6%, but these levels can be less reliable.

    FibRetracement.gif
    You'll notice that the market price tends to reverse when it hits a fib level. This is what is referred to as the "retracement." The market price has a tendency to retrace to one of the fib levels before reversing direction again. Of course it's not totally accurate and reliable on its own, but it is a good indicator to guess where a support or resistance level might develop.

    What do you think? Is Fibonacci retracement a reliable tool? Will you include it in your own analyses of crypto charts? Let the discussion begin!
     
  2. Sean Louk

    Sean Louk Scholar Premium Member

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    Great guide! I was wondering when I'd see more advanced topics like this. There are so many indicators and tools it can be overwhelming for newbies looking to master the trading toolbox.
     
  3. CryptoRyuzaki

    CryptoRyuzaki Scholar

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    This is fascinating! I have heard about the golden ratio being present in nature, but never thought to be also present in the market! Thanks @xyzzy !

    By the way, in this post, looks like the 3rd image is missing. If possible, please reupload it.
     
  4. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    It's working for me on PC, but that image doesn't seem to load on mobile for some reason. Were you on mobile?
     
  5. CryptoRyuzaki

    CryptoRyuzaki Scholar

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    No, I am on PC using Firefox.

    Below is what I see:

    upload_2018-1-15_10-7-59.png
     
  6. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    Okay, I re-uploaded and tested on Firefox myself. Let me know if there is still an issue. Thanks!
     
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  7. CryptoRyuzaki

    CryptoRyuzaki Scholar

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    Thanks! Yes, the image is getting displayed now :)
     
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  8. CryptoBoy

    CryptoBoy Beginner

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    Does anyone here frequently use the fib levels? What are your experiences? Did it usually give good predictions of reversal?
     
  9. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    I use them occasionally. From my experience they "work" better when looking at long term scales (days/weeks/months). It's easier to see their manifestation when looking at historical data retroactively (of course). Hopefully someone who has more experience with fib retracement can chime in :p.
     

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