Fibonacci sequence and retracement: Why does every trader need it?

How does it work in practice?

Fibonacci retracement is one of the most widely used tools in technical analysis on financial markets. In a specific example: when the price dropped from $793.86 to $471.30, the tool automatically calculates key levels where a reversal or consolidation can be expected. In this case, the golden ratio (61.8%) indicated that $594.52 is likely to act as support or resistance. Such precise calculation helps traders make more informed decisions.

What exactly are Fibonacci retracements?

These are horizontal lines on the price chart that indicate potential support and resistance levels. They are derived from the Fibonacci sequence – a mathematical sequence where each number is the sum of the two preceding ones (0, 1, 1, 2, 3, 5, 8, 13, 21, 34…). Although this sequence is not used directly in trading, key ratios are derived from the mathematical relationships between its numbers: 23.6%, 38.2%, 50%, 61.8%, and 100%.

Golden Ratio – the heart of technical analysis

The ratio of 61.8%, often referred to as the “golden ratio”, is particularly important in financial markets. It is at this level that strong price reactions most commonly occur. The Fibonacci sequence provides traders with a mathematical foundation for predicting price movements, helping them navigate the volatile environment of crypto markets more effectively.

How is Fibonacci retracement set in practice?

The procedure is simple:

1. On the price chart, find significant highs and lows.
2. Draw the tool from the top to the bottom ( in a descending trend ) or from the bottom to the top ( in an ascending trend )
3. The tool automatically calculates and draws all Fibonacci levels.

The resulting lines indicate the points where the price could reverse during the trend or where it may consolidate.

Practical applications for various scenarios

Predicting Reversals: During a price correction, retracement levels signal where the movement may stop and a new trend may begin.

Setting Stop-Loss Orders: Experienced traders place stop-loss orders just below key support levels to protect their position.

Profit Target Planning: Levels like 38.2% or 61.8% are used to determine when to take profits and exit a position.

Combination with other tools

Although Fibonacci retracement is a powerful tool, it is not 100% reliable on its own. The most successful traders combine this tool with other technical indicators – moving averages, RSI, trend lines, and volume analysis. When a Fibonacci level aligns with a moving average or a key trend line, the likelihood of a strong price reaction at that price level increases.

The Fibonacci sequence is therefore not just a mathematical curiosity – it is a proven tool that has proven itself to thousands of traders in financial markets.