Fibonacci Trend Analysis – How to Use it for Crypto Trading

Fibonacci trend analysis is a fascinating and widely used method in the world of trading, including cryptocurrency trading. Drawing from Fibonacci retracement levels, these are percentages that are often considered "natural" support and resistance levels.

Read the guide below and explore how to apply Fibonacci trend analysis to crypto trading, how to trade using Fibonacci retracements, plus some practical examples to enhance your trading strategy.

The Basics of Fibonacci Retracement Levels

Fibonacci retracement levels stem from the Fibonacci sequence, a numerical series where each subsequent number is the sum of the two preceding ones (0, 1, 1, 2, 3, 5, 8, 13, etc.).

The key Fibonacci ratios derived from this sequence are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These ratios are used to determine potential reversal levels by measuring the vertical distance between a significant high and low and dividing the vertical distance by the key Fibonacci ratios.

Applying Fibonacci Retracement Levels for The Crypto Market

Crypto traders often use Fibonacci tools to analyze price trends and patterns and identify potential trading opportunities. However, they’re not foolproof formulas that guarantee success in every trade. These tools simply help traders make informed decisions based on historical data and psychological trends in market behavior.

Here are some practical tips:

1. Identifying swing high and swing low

To apply Fibonacci retracement levels, you first need to identify the most recent swing high and swing low on the price chart:

Swing High: the highest point reached before the price starts to decline.

Swing Low: the lowest point reached before the price starts to rise.

2. Drawing Fibonacci retracement levels

Once you have identified the swing high and swing low, you can draw the Fibonacci retracement levels:

On a price chart, select the swing low point and drag to the swing high point in an uptrend (or vice versa in a downtrend).

The Fibonacci tool will automatically plot horizontal lines at the key retracement levels (23.6%, 38.2%, 50%, 61.8%, and 78.6%).

Example:

Suppose Bitcoin (BTC) is in an uptrend, reaching a swing high of $50,000 and then correcting down to a swing low of $40,000. The Fibonacci retracement levels would be calculated as follows:

23.6% retracement: $40,000 + 0.236 * ($50,000 - $40,000) = $42,360

38.2% retracement: $40,000 + 0.382 * ($50,000 - $40,000) = $43,820

50% retracement: $40,000 + 0.5 * ($50,000 - $40,000) = $45,000

61.8% retracement: $40,000 + 0.618 * ($50,000 - $40,000) = $46,180

78.6% retracement: $40,000 + 0.786 * ($50,000 - $40,000) = $47,860

These levels can act as potential support and resistance points where the price might reverse.

Trading Fibonacci Retracements in Crypto

1. Trading strategies

Buying at support 

In an uptrend, traders often look to buy at Fibonacci retracement levels where the price might find support. For instance, if BTC retraces to the 61.8% level ($46,180) and shows signs of stabilizing, it could be a good buying opportunity.

Selling at resistance

In a downtrend, traders look to sell at Fibonacci retracement levels where the price might face resistance. For example, if BTC retraces to the 38.2% level ($43,820) in a downtrend and begins to reverse, it could be a signal to sell.

2. Confirming signals with other indicators

Fibonacci retracement levels are often used in conjunction with other technical indicators to confirm trading signals:

  • Moving Averages: crossovers of moving averages near Fibonacci levels can confirm entry and exit points.
  • Relative Strength Index (RSI): an RSI divergence at a Fibonacci level can indicate a potential reversal.
  • Candlestick patterns: patterns like hammer, doji, or engulfing near Fibonacci levels can provide additional confirmation of a reversal.

3. Setting Stop-Loss and Take-Profit orders

You need to plan your entry points during pullbacks in a trend, and your exit points just beyond the levels to manage risk.

How Fibonacci levels help in setting strategic stop-loss and take-profit orders:

  • Stop-Loss: placed just below the next Fibonacci level to protect against significant losses if the price moves against your position.
  • Take-Profit: placed at the next Fibonacci level to secure gains if the price moves in your favor.

4. Adjust as new swings form 

As the market evolves and new swing highs or lows form, adjust your Fibonacci levels accordingly to identify new potential trading opportunities.

For example, if you’re trading Ethereum and it has been on an uptrend and hits a new high before starting to decline, you might draw Fibonacci retracements from the bottom of the previous upswing to the top of the high. If Ethereum price starts to stall around the 61.8% level, this could be an indication that the retracement is over and the trend may resume, presenting a potential buying opportunity.

Example

Let’s go through a practical example of how to trade using Fibonacci retracement levels.

Scenario:

Ethereum (ETH) is in an uptrend, reaching a swing high of $3,000 and then correcting down to $2,400.

The step-by-step trading plan:

  1. Identify Swing High and Swing Low:

Swing High: $3,000

Swing Low: $2,400

  1. Draw Fibonacci Retracement levels:
  • 23.6% retracement: $2,544
  • 38.2% retracement: $2,672
  • 50% retracement: $2,700
  • 61.8% retracement: $2,808
  • 78.6% retracement: $2,916
  1. Set up the trade:
  • Wait for ETH to retrace to the 61.8% level ($2,808).
  • Look for confirmation signals (e.g., bullish candlestick pattern, RSI divergence).
  • Enter a long position at $2,808.
  1. Manage risk:
  • Set a stop-loss order just below the 78.6% level ($2,916) to limit potential losses.
  • Set a take-profit order at the swing high ($3,000) to secure potential gains.
  1. Monitor the trade:

If the price hits the stop-loss, exit the trade to minimize losses.

If the price reaches the take-profit level, close the position to lock in profits.

How Altrady Can Simplify This Process

Within Altrady, you can use the Take Profit / Exit Ladder feature to set one or more exit targets for a new entry order. Set the ladder type to ‘Scales’ to access the Fibonacci feature.

You can use either entry price % or fixed price for the target price. On fixed price, the Take Profits will remain where they were originally placed during the set-up of the smart position. 

If you have more than one entry order in the smart position for a DCA approach, the TP orders on Entry Price % will drag downward with the Average Entry Price. Simply choose how many orders you want the TP to have with the Orders #; then set the Price Scale to Fibonacci. 
Once you set the price scale, you can also set your size scale. Options to choose from include: 

  • equal
  • linear
  • linear reverse
  • exponential
  • exponential reverse sizing

Equal will set the same base currency amount for each Take Profit flag. You can see this in the chart by looking at the right of the TP flags and see they indicate the same amount of base currency for each flag
take profit size scale equal
Linear will alter this and cause a slower escalation in how much is distributed between each TP target.
take profit size scale linear

Exponential will have a quicker escalation to how much is distributed between each TP target.

take profit size scale exponential

The reverse option for both linear and exponential will arrange these same escalations in base currency for each target, but it will be reversed as implied in the name (e.g., exponential reverse) and it will look something like this:

take profit size scale exponential reverse

The price scale option provides the possibility to space orders between your start and end prices using Fibonacci levels.

price scale editing

Conclusion

Fibonacci trend analysis is a powerful tool for crypto traders, providing insights into potential support and resistance levels. Learn how to apply Fibonacci retracement levels and use them in conjunction with other technical indicators, so you can make more informed decisions and improve your crypto trading strategies. 

Integrate Fibonacci analysis into your trading toolkit and you’ll enhance your ability to predict market movements and execute more profitable trades.