Fibonacci – a series of numbers with strange rules appear everywhere. They exist in the petals of flowers, in the shell of a snail, in the shape of a storm, or even in the shape of galaxies in the universe. This is something that science still cannot explain and they apply to everything in life including investing.
The Fibonacci sequence has the following form:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
The rule of this sequence of numbers is simply that the following number is equal to the sum of the two preceding numbers.
If you take any number (except 0) and divide it by the number that follows it in the Fibonacci sequence, you will get ~0.618, and the later, the more accurate this number will be. And this is the magic behind the Fibonacci sequence: the golden ratio 𝝋 = 0.618.
Another interesting thing: 1 / 𝝋 = 1 / 0.618 = 1.618, and 1 / 1.618 = 0.618 so 0.618 or 1.618 are both golden ratios.
The golden ratio brings perfection in people’s lives every time they see it.
Photography tip: the rule of thirds with the golden ratio.
Applications of Fibonacci in finance
Fibonacci is included in many tools in financial investment in general and in the Crypto market in particular.
The Fibonacci Retracement tool is used to identify the retracement areas after the waves.
Swing High and Swing Low points of the wave.
According to personal experience should choose the highest Swing High and the lowest Swing Low in the wave.
In the Tools panel of Tradingview, select the option as Fibonacci Retracement.
For an uptrend, make a point at the bottom and pull it to the top.
For a downtrend, make a point at the top and drag to the bottom.
As in Fibonancci is applied from the bottom up and investors can see very good price retracement at points. The important Fibonacci levels to be considered and marked are 0.618, 0.5, 0.382.
Another example on a higher timeframe.
Above is the weekly chart of BTC/USDT.
The Fibonacci Retracement tool also proves to be effective with long-term timeframes such as the Weekly Chart.
After the price bottomed, there was a strong pullback to Fibo 0.618, then continued to fall deeply and now has retested Fibo 0.236.
In order to know if this is the bottom of this downtrend, other tools and indicators of current market sentiment are needed.
The core point of using Fibonacci is to find support and resistance areas. It is not recommended to trade with a Fibonacci level more than once because the more times it is tested, the more likely it is that it will break out.
Fibonacci Extension is an extension of Fibo Retracement. Extensions often use the ratio 1.618 to identify next support or resistance.
Just like the Fibonacci Retracement, it is necessary to identify the Swing High and Swing Low points of the wave and the point where the price retracements.
To identify potential support, investors pull from the top to the bottom and then to the highest retracement point.
To identify potential resistance, investors pull from the bottom to the top and then to the lowest retracement point.
As shown in the figure, if investors predict that there will be an uptrend after that, they can use the Fibonacci Extension tool to predict potential resistances when the price rises sharply so that they can plan a smart investment strategy. and efficient.
Price channel overview
The price channel is a tool designed to predict potential support and resistance levels of the price.
There are three common types of price channels:
- The price channel increases, the price creates Swing High and Swing Low gradually.
- The price channel is falling, the price creates swing highs and swing lows lower.
- Horizontal price channel, price moves in a Range.
Price Channel – Fibonancci
The current price channel is probably the most popular analysis combined with Fibonancci today.
To identify an upward price channel, investors need to determine the trendline of the price.
After identifying the Trendline, draw a line parallel to the Trendline, then go through the most bottoms (Downward price channel) and the most peaks (Downward price channel).
Observe the H4 BTC/USDT Chart.
On the chart, it can be identified that this is a typical downtrend with the structure of descending Swing highs and descending Swing Lows.
Based on the yellow marker on the Chart, two Swing High points connect those two points to create a falling Trendline. Just draw a line parallel to that downtrend line and go through the most bottoms to have a bearish channel.
The upper edge of the price channel acts as resistance for the price and the lower edge of the price channel acts as support for the price.
Note: It is not necessary to reframe the price channel so that it matches the price action. Draw only once and let the price run, then watch the price action as it approaches the upper and lower edges of the channel.
Trading with price channel
To trade effectively with the price channel, investors can combine the Fibonacci Retracement tool and dynamic support and resistance.
As the chart above, the price touches the lower edge of the descending channel and then pulls the candle up to form a bullish Pinbar. Price also made a lower Swing Low but the volume was just average. Create a price zone for investors in combination with your own trading strategy.
Instructions for using the Fibonacci tool
In addition to Fibonacci retracement and Fibonacci extension, there are still many other complicated ways of using Fibonacci: Fibonacci fan, ring, arc, wedge, Fibonacci Time Zone…
The common feature of Fibo types: they act as resistance (resistance – support), and “Resistance is created to break”. In investing nothing is certain, all is probability.
Therefore, the way to trade with Fibo is to closely observe the price reaction at the important Fibo area, combined with other technical analysis knowledge such as: set of reversal candles, resistance – support, trendline… to be able to determine the price range suitable for your own trading strategy.
For some investors who follow a safe trend, they can apply the extended Fibonacci, use the partial profit-taking strategy when the price reaches the important Fibo milestones, making sure not to be psychologically or fall into the situation where the price is falling. Profits turn into losses.
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