What is a Fibonacci retracement level? This article explains this analysis tool and its role in trading.
In yesterday’s course analysis (and a few older ones) Fibonacci retracement levels were pointed out. But what are these and why should I care? In this article I would like to answer this question and explain the term quasi from the ground up.
Fibonacci – A “World Formula” from the Middle Ages and the Bitcoin formula
In order to understand the Fibonacci retracement level and the Bitcoin formula it is necessary to clarify who or what Fibonacci is and onlinebetrug explains the Bitcoin formula. And we dare a leap into the past: around the year 1170 Leonardo of Pisa saw the light of day in that very city. As the son of the notary Guglielmo and offspring of the Bonacci family, Leonardo was taught mathematics.
This mathematics was to shape the life of filius bonaccii, or Fibonacci for short, and ultimately the whole of Europe: he was not the first, but one of the most important representatives of the Arabic number system and thus played a significant part in its introduction in the Western world.
For this article, however, it is more important that the so-called Fibonacci sequence is named after him. It is defined as follows: Starting with the one as both the first and second number, each new number is defined as the sum of the last and penultimate numbers. So you get a sequence of numbers with this shape:
This is not only a popular programming task in the basic study of computer science: in the course of time it has been shown that this sequence can describe the most diverse facts of the world. The so-called golden section, which underlies many processes of nature and aesthetics, is ultimately defined by the Fibonacci numbers.
How does this work? If the quotient is formed from a number and its predecessor in the Fibonacci sequence of numbers, a further series of numbers is obtained that gradually approximates the value 1.618. Likewise, if you separate a number by its successor, you get a sequence of numbers that approaches the value 0.618. This ratio between two sections or other quantities is finally the golden section.
So let’s summarize: Thanks to the Fibonacci sequence, one can describe such different things as proportions in art or architecture, the growth behaviour of trees, or the shape of snail shells. Some examples can be found in the contribution picture. It is fascinating that a simple recursive program can model so many different things and is therefore almost like a world formula…
The golden ratio in the financial world
What does that have to do with trading? The fascinating thing for us is that this golden ratio can also be used in the financial world – and thus when trading crypto currencies. It turns out that the Fibonacci sequence can also be used for price movements: the golden ratio also describes the behaviour of the number of traders on the market.
It has been shown that support and resistance lines very often follow the rules of the Golden Section. This is illustrated by a current, slightly modified example from the last Bitcoin price analysis:
Here the Bitcoin development of the last weeks was considered. After scratching at the all-time high, the share price plummeted to EUR 708 by 12 January.
In the above illustration, different coloured lines are drawn for price changes of 23.6%, 38.2% and 61.8% with reference to the price minimum on 12 January and the price maximum on 5 January.
Finally, these levels are three golden sections: the 61.8% divide the distance from minimum to maximum according to the golden section, the 38.2% between minimum and 61.8% and the 23.6% between minimum and 38.2%. These levels are called Fibonacci Retracement Levels.
We see that at these levels the price development often stumbled or completely reversed. In the figure above, such moments are encircled in red. With the Fibonacci retracement levels we are dealing with supports and resistances, so it is worth studying them.
A note at this point: In addition to the levels mentioned above, there are often lines at 50% and 78.6%. While the latter has at least indirectly to do with Fibonacci retracement – 0.786 is the square root of 0.618 – the first is considered to keep track of price falls of 50% and therefore, strictly speaking, have little to do with Fibonacci retracement.