How to Use Fibonacci Retracements for Crypto

FXOpen

Fibonacci retracements have long been used in traditional financial markets. However, with the advent of crypto trading, they’ve also found popularity amongst digital asset traders. In this article, we answer the question “What is Fibonacci in crypto?”, discuss how to trade retracements and offer some strategies you can get started with today.

Understanding Fibonacci Retracements

Fibonacci retracements are based on the Fibonacci sequence mathematical concept. This sequence was discovered by Leonardo Fibonacci, a 13th-century Italian mathematician, and consists of a series of digits where each number is the sum of the two preceding ones, starting from 0 and 1. The sequence is 0, 1, 1, 2, 3, 5, 8, and so on.

The most interesting aspect of this sequence is the so-called Golden Ratio of 1.618. This ratio can be found throughout artificial and natural structures, including the Taj Mahal, tornadoes, and spiral galaxies. This ratio, and complementary ratios, also seem to significantly influence the financial markets.

Fibonacci retracement levels are percentages derived from the Golden Ratio. The most widely used retracement levels are 38.2%, 50%, and 61.8%. These levels represent potential support and resistance areas where the price of an asset, like a cryptocurrency, might bounce back or reverse during a trend. Additional retracement levels, like 23.6% and 78.6%, are also sometimes used, although they are considered less significant.

As traders, we can use the Fibonacci sequence in crypto trading to identify potential areas where a price may reverse or stall, allowing us to make informed decisions about when to enter and exit a position. The retracement levels can be applied to any timeframe, making them versatile tools for different trading styles, including day trading, swing trading, and position trading.

What Does Fib Mean in Crypto?

“Fib” is an abbreviated term describing Fibonacci retracements. While there are other types of Fibonacci tools, such as extensions, fans, and spirals, Fibs will almost always refer to retracements.

How to Use Fibonacci Retracements for Crypto Trading

Using Fibonacci levels in crypto has become increasingly popular in recent years, especially for the world’s largest and most popular digital asset, Bitcoin. The highly volatile nature of cryptocurrencies makes it crucial for traders to identify potential areas of support and resistance where prices may reverse.

To find and use your own Bitcoin Fibonacci levels, follow these steps:

  • Plot the Bitcoin Fibonacci retracement levels by selecting an extreme low and high in an uptrend and vice versa. This can be done using the Fibonacci retracement tool available in most charting software, including the TickTrader platform by FXOpen.
  • Observe price action at the 38.2%, 50%, and 61.8% levels. Each level acts as an area that may prompt a reversal. If the price breaks through one level, it can be assumed the trend is continuing and that the asset will move to the next level.

When drawing the Fibonacci retracement, it’s essential to follow these two rules:

  • When looking to plot support levels, set the first point at a swing low and the second at a swing high.
  • When looking to plot resistance levels, set the first point at a swing high and the second at a swing low.

Optimising Entries and Exits

While Fibonacci retracements can help traders pinpoint support and resistance levels, there are a few factors to consider to make the most out of Fibs for crypto trading.

Trade with the Trend

Like many technical tools, Fibonacci retracements are best applied in line with a broader trend. While you might be looking for a short-term reversal, the setup will have the highest probability of working as expected when it conforms to a higher timeframe trend. In other words, you would want to look for retracements in a larger uptrend and vice versa.

Think of the Levels as Areas

Like traditional support and resistance levels, Fibonacci retracement levels shouldn’t be treated as the exact point where the price will reverse. It happens occasionally, but the price will often move slightly beyond the level before reversing as expected. It may even stop just short of it. Instead, you can treat them as areas of interest and then wait for confirmation using other tools.

Combine Fibs with Other Technical Tools

When looking at a crypto Fibonacci chart, it can be tempting to simply set a limit order at one of the significant levels and call it a day. While this sometimes works, there’s no guarantee these areas will remain consistent. It’s better to evaluate the likelihood that the area will hold, or is holding, using other tools.

For example, you could look for it to line up with a horizontal support/resistance level or a trendline. Momentum indicators, like the relative strength index (RSI), can also offer insights into whether the trend is weakening and is due for a reversal. Additionally, candlestick and chart patterns can provide extra confirmation.

Strategies for Trading Bitcoin with Fibonacci Retracements

Let’s take a look at some specific Fibonacci retracement strategies you can use to trade Bitcoin and other cryptocurrencies.

Trend Trading with Support and Resistance

This approach simply requires identifying a broader trend and waiting for a pullback to one of the key levels that lines up with the horizontal support and resistance level.

Entry: Limit orders can be set at the level within the support/resistance area. Alternatively, you could wait for the area to show signs of reversal before entering with a market order.

Stop Loss: Stop losses can be set just above (in an uptrend) or below (downtrend) the horizontal area. It should be somewhere that invalidates your idea without being unnecessarily wide.

Take Profit: Traders often begin to take profits at the chosen high or low. In the example shown, we could start to take profit at the retracement’s swing low.

Relative Strength Index (RSI) Divergences and Fibonacci

This strategy combines the popular momentum indicator, the relative strength index (RSI), with the Fibonacci retracement tool. Specifically, we’re looking for divergences that indicate a potential reversal as the price moves to a Fib level.

Entry: Wait for a regular divergence to appear at a significant Fibonacci level (right-hand trendline). When the price shows signs of reversal, validating both the retracement and the divergence, traders can enter with a market order.

Stop Loss: A stop can be placed above or below the entry candle, depending on the direction of the trade.

Take Profit: As with the previous strategy, a good place to consider taking profit is at the high or low of your plotted retracement.

As a bonus here, we also have a hidden divergence (the left-hand trendline) that indicates that bullish momentum is likely to happen.

Fibonacci and Chart Patterns


In this strategy, we use chart patterns to confirm the level is holding. In the Bitcoin Fibonacci chart shown, we’ve used a bullish wedge (a common reversal pattern), but you can use any pattern you prefer.

Entry: After observing a chart pattern at a retracement level, you could wait for the pattern to be confirmed with a breakout. Then, you may enter on the retest of the pattern’s trendline. In this example, we could wait for the upper trendline to be broken before waiting for a pullback and entering.

Stop Loss: Stops can be placed above or below the pattern’s opposing trendline. Here, we’d place it below the wedge’s bottom trendline.

Take Profit: You could take profit at the retracement tool's extreme points.

This setup also had extra confirmation with the double bottom before the wedge broke out, providing a high-probability trade.

Confirming Fibonacci with Other Technical Indicators

Of course, RSI isn’t the only indicator you can combine with Fibonacci retracements. Here are some other popular indicators to use:

  • Moving Averages: Moving averages can offer dynamic support and resistance levels that add extra confluence to a Fib setup. Longer-term averages, like a 50 or 200-period moving average, are often respected. Meanwhile, pairing two faster moving averages can help confirm reversals when they cross over.
  • Bollinger Bands: Bollinger Bands are often used to spot potential reversals. Touches to the band that move away sharply can be a sign of a reversal and, when combined with a retracement level, can make for a decent entry.
  • MACD: MACD is another momentum indicator that can help traders find reversals. When the MACD and signal lines cross at a Fibonacci level, this can indicate a reversal is inbound.

Risk Management Techniques

As with all trading strategies, risk management is critical to a sustainable system. However, there are a few techniques that are specific to Fib retracements.

Look For High-Quality Setups

The first step in managing your risk is to only trade the best setups. This means looking for Fibonacci trades that have multiple confirmation factors and waiting patiently to see what you want to see. You might miss some moves this way, but it’ll also keep you out of many losing trades.

Set Logical Stop Losses

When using Fibonacci retracements in crypto, it can be tricky knowing where to place your stop loss. It’s good practice to consider the wider context of your trade idea and how your stop-loss placement fits into it.

If you’re confident that the retracement level will hold or are trading short-term price movements, setting a stop loss beyond the entry level is suitable. Likewise, if you’re less confident that the area will prompt a reversal or are taking a longer-term view of the market, then you may prefer to set your stop loss at the high or low of the Fibonacci retracement.

Establish Take Profit Targets in Advance

By knowing where you want to exit a profitable trade, you prevent yourself from giving up too much profit by holding on too long. Using the take-profit levels discussed is a good place to start, as are Fibonacci extensions.

Develop a Rule-Based System

Having clearly defined rules for Fibonacci entries will remove a lot of the guesswork that comes with discretionary trading. It helps you find the best quality setups, avoid impulsive decision-making, and means you can easily adjust your strategy as you progress.

Common Mistakes to Avoid

When using Fibonacci in crypto trading, traders can sometimes fall into pitfalls. Let’s examine some of the most common errors.

  • Confusing Highs and Lows: As mentioned, selecting a high or low as your first point when plotting the retracement depends on whether you’re looking for support or resistance. Be sure to follow the rules described earlier to avoid any confusion.
  • Confusing Fibonacci Retracements for Extensions: Retracements identify potential support and resistance levels during a price pullback, while extensions project potential target levels beyond the original high or low. Double-check the name of the tool you’re using to avoid getting the two mixed up.
  • Ignoring the Bigger Picture: Always consider the overall market context and trend before making a trade. If the market is strongly trending in one direction, a reversal at a Fibonacci level might be less likely.
  • Misidentifying Significant Price Points: Selecting the correct high and low points is essential for accurate retracement levels. This usually means selecting the most extreme swing highs and lows that are easily visible. Take your time to identify the most significant price points, and be prepared to adjust your points as the market progresses.

Closing Thoughts

In summary, Fibonacci retracements can make for an excellent addition to your crypto trading arsenal. While they shouldn’t be used in isolation, combining Fibs with other technical tools and indicators can make for an effective strategy.

However, the tips, techniques, and strategies described here aren’t exclusive to crypto: they can be applied to whichever market you prefer to trade, like forex, stocks, and commodities. Want to see for yourself? You can open an FXOpen account to gain access to these markets and the advanced TickTrader platform, where you’ll find the Fibonacci retracement tool and the indicators discussed waiting for you. Good luck!

*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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