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What is Fibonacci retracement and how does it work?

What is Fibonacci retracement and how does it work?

What is Fibonacci retracement and how does it work?

Once you get into the trading game, you know that it doesn’t get easier with time, rather the only way to make it easy and more profitable is to use some little tricks. Now, these tricks are nothing new, they are tried and tested strategies by traders across the globe. We have discussed so many such strategies in our previous blogs, including Moving average convergence divergence, how to identify support and resistance, etc. 

But this one is a little different, it’s called the Fibonacci retracement tool. Sure, you must have studied the Fibonacci series during your time in school. But, this might come to your surprise that this is also an amazing real-life tool used in trading. 

Now, let’s just have a quick revision of what a Fibonacci series is.

What is the Fibonacci series?

So, each number in the Fibonacci sequence is the sum of the two numbers that precede it. Usually, it starts at 0 and 1. The numbers 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so forth make up the Fibonacci sequence. 

Now that your knowledge of Fibonacci has been brushed up a little, let’s check out how this concept can be used as a crypto trading strategy.

What Are Fibonacci Retracement Levels?

Hidden levels of the horizontal lines of support and resistance known as Fibonacci retracements indicate probable price reversals for the particular crypto assets.

The Fibonacci retracement is taken from the Italian mathematician Fibonacci sequence, which as explained above, appears in both nature and mathematics. This is a really effective tool when it comes to examining a price chart to identify probable turning points.

These are the four main retracement levels where a reversal may begin. 

Using Fibonacci retracement tools is fairly easy and here’s how you can start off with your new trading strategy:-

Step 1: Find a complete trend as the first step. The instrument can be used to analyse upward and downward trends. Additionally, the tool can be used with all chart time frames.

Step 2: Draw the Fibonacci retracement lines in the opposite direction of the finished trend in step two. Drawing the Fibonacci retracement from left to right upward for a finished rally entails doing so. Draw the pattern from left to right, stopping at the end of the decline, for a finished downtrend.

Step 3: Next, watch for a price reversal to occur close to the four important levels. To predict a price reversal, pay attention to these crucial levels.

Step 4: Fourth, place your trade by going against the first trend. Retracement of an upward trend indicates a downward price correction. Then, choose one of the four significant Fibonacci retracement levels as the entry point for a bullish trade. At the retracement level, as a novice trader you might enter the position without thinking. But before entering long, expert traders will watch for the price to react and break higher.

Risk Management Technique

Well, the way to manage your risk in this strategy is to set a stop loss just below the swing low of a long trade or just above the swing high of a short one if a suitable trading opportunity has been discovered. Place a target at least twice as far away from the stop loss to establish a solid risk-to-reward ratio.

Combining the Fibonacci retracement tool with additional technical analysis indicators increases its potency. For instance, the Fibonacci level may or may not signify a buy or sell decision. You can always use indicators for a more solid foothold in the market.

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Disclaimer: Crypto products are unregulated as of this date in India. They could be highly volatile. At Unocoin, we understand that there is a need to protect consumer interests as this form of trading and investment has risks that consumers may not be aware of. To ensure that consumers who deal in crypto products are not misled, they are advised to DYOR (Do Your Own Research).

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