One of the technical analysis tools you can use for your strategies is known as Fibonacci retracement. This tool allows traders to predict the areas in which the price of an asset could move within a market. We could say that the Fibonacci retracement is a price oracle in which Fibonacci ratios are used as percentages. And, which allow us to calculate with a certain degree of probability the price intervals of an asset.
Fibonacci retracement is named after the well-known mathematician Leonardo de Pisa, who was more widely known as Fibonacci. This is because it was the discovery of the Fibonacci Succession, which led to the creation of this very useful technical analysis resource within the trading world.
The theory behind the Fibonacci Succession is that nature expresses itself through mathematical relationships closely related to the natural numbers. This relationship allows us to identify numbers that starting with zero and one, the next will be the expression of the sum of the previous two. This simple relationship leaves us with a list of numbers like the following:
Following this relationship, we were able to identify a series of percentage values that have the same relationship, which are as follows:
- 0%
- 23.6%
- 38.2%
- 61.8%
- 78.6%
- 100%
These are the well-known Fibonacci retracement ratios and these are used to represent the possible price action ranges of an asset, indicating useful information such as market entry and exit points, support and resistance levels, among others.
Background and importance between Fibonacci Succession and Fibonacci Retracement
Now, you may wonder how a set of natural numbers can have so much importance and relationship with the world of trading. The answer to that question can be found thanks to the golden number, an irrational number that is closely related to the Fibonacci Succession (which are natural numbers). The approximate value of this golden number is:
But, How can this number be related to the Fibonacci Succession? Well, the simplest way to see this is to take the Succession and divide a random number of it with its immediately preceding one. To exemplify this better let’s do a simple example, taking into account the following Succession:
If in this case, we take the number 21 (as numerator of the division) and the previous number as denominator (in this case, the number 13) and if we perform the division we are left with:
21 / 13 = 1.615384615384615
A number that is quite close to the golden ratio, and in fact if we scale our selection, we will see the relationship:
89 / 55 = 1.618181818181818
The relation of the Succession with the golden number becomes closer as we scale the quantities, but not only that, this Succession is also related to the Fibonacci regress in a very similar way. For example, if instead of dividing a chosen number with the previous one, we do the opposite, then we have:
21 / 34 = 0.6176470588235294
And if we repeat with other higher numbers, we get a very similar value:
144 / 233 = 0.6180257510729614
Calculating the retracements
Now, to calculate the retracements we take into account whether the calculation trend is bearish or bullish, leaving us with the following:
Uptrend
If the trend is upward, the retracement value is calculated with the following parameters:
- Ca: which is the minimum price during the previous trend.
- Cb: which is the maximum price during the previous trend.
- Rel %: these are the percentages given above.
And on them the following formulation is applied:
Rfib = Cb – ( Rel % x (Cb – Ca))
Downtrend
If the trend is downward, the value of the retracement is calculated with the following parameters:
- Ca: which is the maximum price during the previous trend.
- Cb: which is the minimum price during the previous trend.
- Rel %: these are the percentages given above.
And on them the following formulation is applied:
Rfib = Cb + ( Rel % x (Cb – Ca))
How to use Fibonacci retracements in Atani?
However, with Atani you don’t have to complicate your life by doing manual calculations to know the retracements. Instead, just go to the chart you are analyzing and use the drawing tools to achieve your goal. In this case the tool to use is called “Fibonacci Retracement” and just draw it on the chart to get the results you are looking for.
For this example, we will use the BTC/USD pair from Bitfinex, to know the Fibonacci Retracement values of this pair in the future:
In our case, we start from a time frame in which we see a clear trend, taking a price as a base (where you have entered) and the minimum locating it within the red price zone (area where you do not want to be to avoid maximum losses for a possible break with a downtrend). By locating that space we have the following with the tool:
Analysis of the tool
There we can quickly identify:
- A swing price which is the current price of the asset (in this case it is shown in green).
- A price in blue (upper) which is the price of the asset in our reference.
- A price in blue (lower) which corresponds to the minimum price allowed by our strategy. This price is preceded by a red zone, which is where we can place our stop-loss to avoid losses.
- The downward zones (below the gray zone) show the entry points in case you are not in the market yet. The lower zones being zones of attention where entering is dangerous because of a probable bearish breakout.
- The upward zones (above the gray zone) show the bullish entry or take profit points depending on your case.
- Finally, the gray zone is a non-relevant area. In this area is where entering or exiting may not offer you any significant gain or loss.
As you can see, the Fibonacci retracement is a very useful tool when analyzing the market and predicting action zones for your strategies.
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