Trading 101

Fibonacci Ratios are an important part of any currency trading. And for trading Bitcoin, it’s no different. In this lesson, we look at Fibonacci Retracement and Fibonacci Extension.

Leonardo Fibonacci discovered that a simple series of numbers created ratios. These ratios were able to describe the relationships of things in nature and the universe.

This is the series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, etc…

You start with 0. This is followed by 1, obviously. Then you do 0 + 1 = 1. Then you add the second and third number (1 + 1) = get 2, etc…

The ratio of any given number to the following higher number = 0.618. For example (e.g. 21/34 =  0.618). This is the golden ratio.

In terms of Bitcoin, Altcoin and Currency Trading

Fibonacci Retracement :

These are the levels you need to know: 0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension :

These are the levels you need to know: 0, 0.382, 0.618, 1.000, 1.382, 1.618

You can find plenty of Software and Calculators that will graph all this for your trading. So, you won’t need to sit down and calculate it all yourself.

Fibonacci retracement is used to identify support/resistance points. While Fibonacci Extension represents profit taking levels. As these Fibonacci levels are so popular and widely used by traders, they tend to become true simply because everyone believes it.

Using Fibonacci Retracement

Fibonacci trading works best when a market is trending (up or down, doesn’t matter).

You want to:
When the market is trending up, go long (buy) on a retracement (at Fibonacci support).
When the market is trending down, go short (sell) on a retracement (at Fibonacci resistance).

Finding The Retracement Levels:

a) Uptrend

With most software you simply click on the Swing Low. Then you and drag the cursor up to the Swing High. In this case, you take the low of 0.6955 on April 20th and bring it up to the high of 0.8264 on June 3.

On the right side, the Fibonacci Retracement levels appear. They are the numbers in orange.

A ‘Swing High’ you can identify as a recent high, and it has two lower highs on the left and right of the high itself. A ‘Swing Low’ is identified by a recent low, and it will have at least two higher lows on either side of the low.

So, now we’ve found the Fibonacci numbers, what do they mean? Well, the idea is that if the price does retrace from its current high it will find support at, at least one of these retracement levels.

b) Downtrend

So, we have a ‘Swing High’ (1.4195) point set, dragged down to at ‘Swing Low’ at 1.3854.

The software has discovered the Fibonacci retracement levels on the downside, as listed on the right-hand column, in orange. So, if we get a bounce and the price starts to retrace up from the ‘Swing Low’, we can expect that it could possibly meet resistance at, at least one of those Fibonacci levels.

Careful though. Fibonacci is good, but not perfect. Those Fibonacci levels should always be considered what they are, general interest areas. Sometimes they are called ‘kill zones’. But we’ll get to that later.

Fibonacci retracement levels can and do fail. We’ll address that next.

When Fibonacci Fails

Fibonacci tools and retracement fails sometimes. It’s a reality of life.

Fibonacci retracements do NOT always work! They are not foolproof. Let’s go through an example when the Fibonacci retracement tool fails.

Look at the 50% Fibonacci Level. It seems to be holding steady and true, doesn’t it? This would seem to indicate that it’s time to short.

In reality, if you assumed that, you would have taken a big hit on your trading account (if you did not manage the risk properly).

This example, taken from real market action, saw the price rally big-time from that Fibonacci holding point. Woops.

This is not a perfect world. The price can do anything. Sometimes it might just ignore Fibonacci altogether. You have to protect your positions.

Also, remember, while the software tells you the Fibonacci points, it doesn’t tell you which ‘Swing Low ‘ or ‘Swing High’ you should use. That is data you have to input yourself.

If there is no clear, identifiable trend on the chart, then it becomes kind of a guessing game at times.

You’re a trader. As such, you’re like a professional athlete. To be successful you have to refine your skills. A fibonacci retracement is a good tool. But it is just one in your arsenal. You need to combine it with other tools, to build an arsenal. Then you will have the best chance of success.

We’ll help you with that. Next up we’ll show you how to use Fibonacci retracement with other support, resistance and candlesticks (remember those), to really start being a good, well-rounded, trader.

Fibonacci Retracement with Support and Resistance

We don’t make too many recommendations in this guide. We provide the tools. Then it is up to you to find your own strategy and approach. The technique is purely individual, it is a personal means of expression.

However, we will recommend that you do not use Fibonacci retracement as a tool on its own. It is best used as part of an arsenal, with other tools.

Here we’ll show you how to combine Fibonacci Retracement with some other tools we’ve already taught you.

With Support and Resistance

When Fibonacci points are also support/resistance points already, the odds are better of a price bounce from those points.

The uptrend here is quite clearly defined. There are so many green candles. There are profits to be made on the upside. But where to enter?

The first step, use Fibonacci retracement (Low at 1.0132 – Jan. 11 / High at 1.0899 – Feb. 19).

So now we are looking for the best entry point.

We see that 1.0510 was strong resistance previously. Further, it matches the 50.0% Fibonacci retracement point. It was well and truly broken on Feb. 1st. So it could very well represent a good support point to buy in at.

You should be actively looking for price levels that have been previous areas of interest.

With so many traders, all over the world, using the same Fibonacci tools, it’s very likely a lot of traders are setting their orders at those levels of interest. These are higher probability trades that give you a better chance of success.

Fibonacci Retracement with Trend Lines

Using Fibonacci Retracement with Trend Lines is a good strategy. Remember, for Fibonacci to work in the first place the market must be trending. So, trend line analysis combined with Fibonacci a smart strategy that gives you a great chance of success.

This is an obvious uptrend. It doesn’t get more obvious. Some short term profits are available, at a good entry point.

To assess the best entry point, firstly we set our Fibonacci Retracement Analysis. As usual, we set the Swing Low / Swing High (82.61 / 83.84).

Here we see 50.0% and 61.8% Fibonacci points are intersected by a rising trend line. This would indicate that these are potential support levels. And, as such, would represent a good entry point for short term profit.

While trend lines themselves are subjective, the fact that there is a trend developing can be a little more obvious. When you see that trend, why not combine Fibonacci Retracement with trend line analysis, to find a good entry point, and take advantage of that trend?

Fibonacci Retracement with Japanese Candlesticks

When combining Fibonacci with Japanese Candlesticks we’re looking for ‘exhaustive’ candlesticks. That is, we’re looking for a point where buying/selling pressure is becoming exhausted. This could indicate that the price would continue trending.

Here we see a pretty obvious downtrend, followed by a recent bounce.

We’ll set Swing High / Swing Low at (1.3364 / 1.2523 – Mar. 3rd / Mar. 6th).

Since it’s a Friday, you decided to just chill out, take an early day off, and decide when you wanna enter once you see the charts after the weekend.

This is a real-life example. Here you can see that the 50.0% Fibonacci level did hold briefly.

However, the price did move higher. The candles are damn bullish. So it might be a good idea to wait at the 61.8% Fibonacci level, to see if it holds.

Remember, we were trying to get in on a downtrend here. And it looks like there is a chance the price could just continue to shoot up. So, we wait.

Now, we see that a long-legged Doji has formed at the 61.8% Fibonacci level.

From our previous lessons, we know that this is an “exhaustive candle.” So perhaps we have finally seen the end of this short term spurt in buying pressure. An exhaustive candle right on our Fibonacci line is a good probabilistic indicator of that.

It may well be time to go short as we see the return to the longer-term bear trend.

The Candlestick was right, buyers were starting to lose momentum. Sellers took control right after that candlestick. These Fibonacci-Sticks (Fibonacci Retracement points that line up with Japanese Candle-sticks) are often great indicators.

When you see one form, it’s a good strategy to just enter the trade at the market price.