What is Fibonacci Retracement Level?
Let's find out Fibonacci Retracement Level meaning, definition in crypto, what is Fibonacci Retracement Level, and all other detailed facts.
Fibonacci retracement levels refer to the key numbers of the Fibonacci ratio. The ratio was created by Italian mathematician Leonardo Fibonacci in 1170. The Fibonacci retracement levels consider two extreme points of the ratios, including 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
The Fibonacci sequence follows a numerical pattern of 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each number is the sum of the previous two numbers and is exactly 1.618 times bigger than the previous number.
In order to calculate a Fibonacci ratio (Fib ratio for short), the numbers in the sequence are divided. For example, by dividing 34 by 55 or 55 by 89, you get a ratio of 61.8%.
In financial markets, Fibonacci ratios can be used to denote the asset’s price momentum. They are used by technical traders to visualize resistance levels, draw support lines, and determine take-profit targets.
When depicting Fibonacci retracement levels, horizontal lines are used to represent the support and resistance levels that correspond to a specific ratio or percentage. The graph represents the movement of a price and its attempts to reverse it.
It is generally expected that the trend will continue in its trajectory. However, the price of the asset may first retrace to one of the aforementioned ratios.
Fibonacci retracements are drawn on 1D charts to identify the long-term trends of the asset price. Based on the Fibonacci retracements, the trader includes criteria such as entry and resistance levels, stop-loss targets, and support lines.
While the choice of ratios may vary from trader to trader, the most common Fibonacci ratios used in market analysis are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
There are certain downsides to using Fibonacci retracements as a technical indicator. Firstly, the indicator is not objective and can only be applicable to a limited range of assets. In order to have the Fibonacci retracement working in the market’s favor and accurately reflect the asset’s price momentum, the same Fibonacci ratios must be used by a large number of traders.
The Fibonacci retracement level is not based on any logical proof. Therefore, it cannot be reliably used as the sole technical indicator. It’s advisable to use the Fibonacci retracement level in tandem with other indicators, such as the Aroon indicator, Moving Average Convergence Divergence (MACD), on-balance volume (OBV indicator), or the relative strength index (RSI).