What is Fibonacci retracement in crypto?

Fibonacci retracement is a charting tool that marks how much of an earlier price move has been given back. A trader picks a high and a low, and the software draws horizontal lines at set percentages of the distance between them. In crypto, as in stocks, these lines are used as possible areas of support or resistance, the ideas covered in how to read a crypto chart.

What is Fibonacci retracement in trading?

The tool is drawn on a finished move. If a coin rose from $15 to $20, the move is $5. The 23.6% retracement sits $1.18 below the top, at $18.82, and the 50% level sits halfway, at $17.50, as SoFi's example shows. The 0% line marks the end of the move and the 100% line marks a full return to the start.

Charting platforms do the arithmetic. On Schwab's thinkorswim, for example, the user clicks one swing point and then the opposite one, and the levels appear automatically. The result depends entirely on which high and low the user chooses, so two people can draw different levels on the same chart.

What are the Fibonacci retracement levels?

The standard set is 23.6%, 38.2%, 50%, 61.8% and 78.6%. They come from the Fibonacci sequence, 0, 1, 1, 2, 3, 5, 8, 13 and so on, in which each number is the sum of the two before it. Schwab explains that dividing a number by the next one gives about 61.8%, dividing by the number two places along gives about 38.2%, and three places along gives about 23.6%.

The 50% level is not a Fibonacci ratio at all. Schwab and SoFi both note that traders include it because a halfway retracement is seen as psychologically important.

What is the Fibonacci retracement golden ratio?

As the sequence grows, each number becomes about 1.618 times the one before. This is the golden ratio, which Euclid described around 300 BCE, according to Schwab. Its inverse, 0.618, gives the 61.8% level, which many traders treat as the most important line on the tool.

How do Fibonacci retracement and extension differ?

Retracements measure pullbacks inside a move that has already happened. Extensions project beyond it, which traders use when price reaches a new high or low and older levels no longer apply. Schwab lists 127.2%, 161.8%, 200%, 261.8% and 423.6% as common extension levels. Drawing them takes three points: a swing high, a swing low and the end of the pullback.

Both versions have limits. The Wikipedia summary of research cites studies that found no evidence the levels matter more than other percentages, and backtests across thousands of stocks in which 38%, 50% and 62% pullbacks were no more common than other values. SoFi adds that the levels often sit close together and are open to interpretation. Where the lines appear to work, it may be because many traders watch them at once. Other indicators, such as the RSI, have the same weakness of describing past prices only.