Fibonacci Retracements become critical when you are analyzing a shift in trend. They can precisely indicate when the possibility of a reversal is the highest. These retracement levels become essential when you are at the worst phase of a downtrend, helping you avoid a premature sell. Similarly, when you are riding an uptrend, these retracement levels become handy in anticipating a trend reversal, helping you sell near the peak.
What is a Fibonacci Retracement?
Fibonacci Retracement is a technical analysis indicator that helps in identifying trend reversals. The indicator does not predict anything (i.e., it is not a leading indicator); rather, it is a critical indicator for estimating the points at which the chances of reversal are at their maximum.
The start of each trend is set to 0, i.e., the point where the reversal occurs, and the end of each trend is set to 100, the same reversal point but for the opposite trend.
Reversal trends occur at 23.6%, 38.2%, 50% (not strictly Fibonacci but used), 61.8%, and 78.6%. Among them, the most valuable is the 61.8% ratio called the Golden Ratio. A ratio occurs when the cryptocurrency recovers that percentage from the start of the current trend.
Note that the trend falls from $1.03 to $1.02, and then recovers, only to encounter a Fibonacci Retracement at 38.2% (i.e., after recovering 38.2% from the downside). This reversal again turns the trend negative.
How do Traders Use Fibonacci Retracement?
All assets do recover to a certain extent when they fall or correct to a certain extent when they rise. Traders usually keep an eye on all the ratios and set alerts. When the recovery, or the opposite trend, reaches a certain level, say 61.8%, they get ready for a reversal. To ensure that they do not fall prey to a false reversal, they employ options to secure their downside.
How to Confirm a Retracement?
A Fibonacci retracement must be confirmed; otherwise, there is a risk of falling for false reversals.
There are two ways to ensure that the retracement is real rather than false
First, traders use technical indicators such as RSI, MACD, etc., to confirm that the retracement has sufficient momentum to sustain the move.
Also Read: What is Relative Strength Index (RSI)?
Second, traders use fundamental analysis, indicators such as market liquidity, upcoming interest rate cuts, etc.. show that the price of assets do have a real reason to grow.
Disclaimer: BFM Times acts as a source of information for knowledge purposes and does not claim to be a financial advisor. Kindly consult your financial advisor before investing.
