To understand what the Fibonacci Retracements & Fibonacci Ratios are, we must first touch upon the origin of the Fibonacci sequence. The Fibonacci sequence is a set of numbers where each number is formed by the sum of the two previous numbers. So, the Fibonacci numbers that start with zero and one look like this:
- 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597…
What makes the Fibonacci sequence remarkable is the fascinating Golden Ratio.
The Fibonacci retracement levels are the lines that predict the location of support and resistance. These levels are used by traders to better time their trades. Every level is connected to a percentage. The percentages 23.6%, 38.2%, 61.8%, and 78.6% are known as the Fibonacci retracement levels. Many traders also use 50%, however, it is not an official Fibonacci retracement level.
Why is Fibonacci Important?
This system proved itself very useful to many traders, and it is not that hard to use. The indicator can be drawn in the middle of any two price points, often a high and a low. Afterward, the levels will be created based on those points. We must note that Fibonacci retracement levels do not change, therefore, they are known as static prices. Being static allows traders to easily identify those levels. That is what makes this system widely used.
But what do Fibonacci retracement levels tell a trader? As we mentioned before, these levels are used by traders to determine whether a specific time is good for entering the market. Since the golden ratio is found nearly everywhere, traders believe that it also applies to the financial sector. So, these levels are often used to determine stop-loss levels, place entry orders, or even to set price targets.
Because the Fibonacci retracement levels are already given to you through the above-mentioned percentages, there is no need for calculation. Simply put, they are the percentages of any specific price range that you choose.
Does Fibonacci Have Limitations?
Even though this system is quite useful, it has some limitations. For example, there is no guarantee that the price of a cryptocurrency will stop where a Fibonacci retracement level is. Moreover, many argue that it is highly likely for the price of a cryptocurrency to reverse while near one of the levels since there are so many.
- The Fibonacci numbers are based on the Golden Ratio. That is what makes the Fibonacci retracement levels remarkable.
- The percentages 23.6%, 38.2%, 61.8%, and 78.6% are considered to be the official Fibonacci retracement levels.
- The drawback of this system is that there is no guarantee of whether the price of a cryptocurrency will reach the levels that are indicated by the system.