The Fibonacci sequence
5 min reading
Another well-known tool of technical analysis is the Fibonacci sequence. Keep reading to know everything about it.
The Fibonacci sequence
The rise of cryptocurrency has seen the introduction of different technical analysis methods implemented by traders to determine or speculate on the price fluctuations. These speculations may be market analysis frameworks like the Elliott Wave Theory or the Dow theory. Apart from these theories, there are indicators that traders use as tools to know when to buy, sell or hold their digital currencies. Some of these indicators include Moving Averages, Relative Strength Index, Ichimoku Cloud, etc. In this article, we will elaborate on the Fibonacci sequence that is used by traders in stock markets, Forex, and cryptocurrency markets. We will also give relevant information on how you can use this indicator to trade on the bit4you.
What is it?
This can be described in its simplest forms as a tool used by traders to predict their interests on charts. They derive the Fibonacci sequence from a string of numbers and they plot them horizontally on the chart. This sequence is not obtained by guesswork. it starts with a 0 then 1 and later you add two preceding numbers to get the next sequence. For instance, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on, till infinity.
History of Fibonacci
This sequence was invented by Leonardo Pisano Bigollo, Italian born of an Italian business person and grew up in a trading company in North Africa. Most Italians in the middle were business tycoons and merchants and therefore needed to master arithmetic in order to keep track of their transactions. However, at that time they used Roman numerals that seemed very difficult to understand, let alone make calculations. While growing up Fibonacci learned the Hindu-Arabic system of calculating, after which he published a book called Liber Abaci which proved the Hindu-Arabic arithmetic system superior to the Roman numeral system. You should wonder how the Fibonacci sequence came about. There was a mathematical problem about annual rabbit breeding and multiplication. So they considered that if a rabbit, male and female, gives birth to a new pair of rabbits, the new pair will bring forth another pair after a month of their birth because rabbits only give birth after one month of their birth. And so every month they have at least a pair added to their number. Hence, the Fibonacci sequence.
Calculating the Fibonacci sequence is not as complicated as it may appear. Remember that we mentioned it involves adding up the last two preceding numbers to get a new sequence. For example, we have a sequence of 0, 1, 1, 2, 3, 5. To get the next sequence, we will add 5+3 = 8 and trading. In trading, they derive these numbers from a mathematical calculation between these sequences. Notice that the Fibonacci sequence only comes alive after you calculate the ratio between adjacent numbers in the sequence. Let us take, for example, 34 divided by 55 equals 0.6181 and as you keep dividing and extending to the right, the numbers move closer. This 0.6181, when converted to a percentage, gives 61.8 percent, which is one of the Fibonacci retracement levels.
How to use it on Bit4you
To apply the Fibonacci indicator on bit4you, you only need four simple steps. Find a completed trend, whether an uptrend or a downtrend. Draw the Fibonacci retracement lines in the direction of the completed trend. This means for an uptrend, it will be drawn from left to right, and right to left for a downtrend movement. Wait for the price to reverse near the four key levels. When this happens, the trader can enter the trade toward the original trend. Some traders may prefer to enter the position at the retracement level, while others prefer to wait for the price to react and break before they trade.
In a nutshell, Fibonacci is a popular tool that traders can use to draw their lines, identify resistance levels, stop loss, and even set some target prices. To create a Fibonacci replacement, the trader will have to take two extreme points on a stock chart and divide the distance by the key Fibonacci ratios of 38.2%, 50%, 61.8%, 0.78%, and 100%. Notwithstanding, Fibonacci is not void of setbacks, as it also faces the same drawbacks as other universal trading tools. That is why they are best used in tandem with other indicators.