Chart Decoder Series: Fibonacci Retracments – Mathematical Patterns that Predict Market Behavior

02 October Chart Decoder Series: Fibonacci Retracments – Mathematical Patterns that Predict Market Behavior

Welcome to the Chart Decoder series. Turn complex trading tools into practical strategies.

Our journey so far:

Today we are exploring the retracement of Fibonacci, a mathematical tool that reveals where the market is most likely to find support and resistance.

Mathematical Basics

The Fibonacci sequence is a simple pattern where each number is summed up to 1, 1, 2, 3, 5, 8, 13…). What’s appealing is the ratio between these numbers. As the sequence increases, the ratio becomes stable around 1.618It is also called Golden Ratio.

This ratio appears everywhere in nature:

• Seashells and Galaxy Spirals
• How leaves grow around the stem
• Percentage of the human body
• Trees and river branches

A transaction converts these mathematical relationships into retracement percentages. The important Fibonacci ratio comes from the golden ratio (1.618).

• 61.8% = 1 ÷1.618 (inverse of the golden ratio)
• 38.2% = 1 – 61.8%
• 23.6% = 38.2% x 61.8%
• 78.6% = 61.8% square root

Why this is important for trading:

These are not arbitrary numbers, but mathematical relationships that appear throughout nature. When applied to price movements, it often marks where buying and selling pressures change naturally.

• 61.8%: Golden ratio. The most powerful retracement that often involves major bouncing. Institutional traders closely monitor this level to represent mathematical “decision points” for the continuation of the trend.
• 38.2%: A general correction level where prices temporarily suspend before resuming major trends.
• 23.6%: Shows strong fundamental momentum. Robust trends rarely retreat beyond this level before continuing.
• 78.6%: Represents the “last stand” of the trend’s continuation. Below this level, it usually indicates an immediate trend reversal.

Set up a Fibonacci retracement in Bitfinex

Fibonacci retraces identify potential inversion levels during market corrections. This is the process:

1. Identify trends:

• Open Trading.bitfinex.com and select a trading pair.
• In the toolbar on the left, look for “FIB Retracement” Tool (sees like 4 horizons)
• Find clear movements in the chart. It can be either a rally (low to high) or a drop (high to low).

2. Find a swing point:

• Swinglow: The obvious lowest point where prices bottomed before they rose
• Swing High: The obvious best point where prices peaked before they descended
• Tip: Zoom out and see the big picture – you need the most obvious turning point, not the small bump

3. Apply the tool:

• Uptrend: Click on Swing Low and drag onto Swing High
• Down trend: Click on Swing High and drag onto Swing Low

4. View level: This tool automatically plots retracement lines (23.6%, 38.2%, 50%, 61.8%, 78.6%). They act as potential support and resistance zones.
5. Plan your deal: Traders use these levels to set time entries, profit targets and place stop losses.

The psychology behind it: The market is exposed to waves due to human emotions, fear and greed.

Actual example: BTC/USD analysis

• Swinglow: $98,514 (June 22)
• Swing High: $123,702 (September 8)
• range: ~$25,188

Calculated retrace:

• 23.6% – $117,757
• 38.2% – $114,080
• 50% – $111,108
• 61.8% – $108,136
• 78.6% – $103,904

Current price: $117,830

Focusing on how BTC retreated deeply from its September height, we will test the important 61.8% “golden ratio” level at around $108,136. This demonstrates the power of Fibonacci’s retracement. The 61.8% level served as a strong support, creating a large bounce. This is the classic Fibonacci behavior where Golden Ratio levels provide a high power inversion zone, allowing the trend to continue after testing this mathematically important support level.

Advanced Fibonacci Strategy

1. Multiple time frame analysis

Apply Fibonacci to various time frames for confluence.

• Daily Chart: Key swing points for position trading
• 4-hour chart: Mid-level swing trading
• 1 hour chart: Tweak your day trading entries

2. Fibonacci Confluence Zone

The most powerful setup occurs when multiple factors are aligned.

• Fibonacci Level + Horizontal Support/Resistance
• Fibonacci level + moving average
• Fibonacci Level + Trend Line
• Multiple Fibonacci levels from different swings

3. Extended Projection

Passing past the previous high or low values, Fibonacci can project not only with pullbacks The move may move on to the next one. Traders often see:

• 100% – Equivalent to the last swing.
• 127.2% – First expansion target.
• 161.8% – “Golden Target” where many trends pause.
• 200%+ – Aggressive movement in strong trends.

4. Fibonacci + Other metrics

• Fibonacci + rsi:
  Excessive rows of rsi at Key FIB level = high resistance bounce. For example, an RSI below 30 with a 61.8% retracement often shows significant lows. Waiting for RSI to emerge from oversales with FIB support
• Fibonacci + ATR
  Use the ATR to set a stop above the Fibonacci level. For example, if the 61.8% level is $96,460 and the ATR is $3,000, the location is $93,460. ATR guarantees stop accounts for normal volatility
• Fibonacci + volume
  A large amount of FIB levels confirms importance. For example, 61.8% = Volume spike + bounce with strong inverted signal. A massive break of 78.6% suggests a change in trend
• Fibonacci + Macd
  MACD divergence at the Fibonacci level creates a powerful inverted setup. An entry trigger occurs when the MACD line passes over the signal line and the price retains Fibonacci support.

Bonus Read: Fibonacci + RSI Behavior

Looking at this BTC Daily Chart, it has a 61.8% “golden ratio” level of $108,064, serving as a major support. When BTC traced from its highs to this important Fibonacci level, it found strong buying interest and bounced back significantly.

BTC recovers above $117,000 from this mathematical support level, showing how a 61.8% retrace marks a critical turning point. Current RSI reads at 62.20 indicate healthy momentum has returned after recovery.

The next level of viewing is a 23.6% retracement of $117,677. The rise in RSI and the break above could indicate a continuation to new highs. However, if the RSI begins to vent negatively during price struggles at this level, it could indicate that another test is coming with deeper Fibonacci support.

Common Fibonacci mistakes to avoid

Swing Point Slip Up
Do not use small heights and low values. They give messy signals. Stick to clear and obvious swing points that appear in multiple time frames.

Fighting trends
One FIB line does not overturn the big picture. Don’t oppose it, always trade in the direction of a larger trend.

I’m jumping too much
Do not buy the second price of the level. Wait for confirmation: An indicator of candlestick pattern, volume, or momentum.

Blindly trust FIB
Not all levels are retained. Use the stop to find a confluence with the moving average or other Fibonacci levels.

Ignore the context
Consider news, economic data and market sentiment along with Fibonacci analysis.

Fibonacci Limitations

Subjective: Different analysts choose different swing points and may differ slightly in level calculations.

market conditions: Fibonacci analysis works best in trending markets, but can provide false signals during landscape price actions.

Historical foundation: These tools analyze past price movements rather than reliably predict future price actions.

Fake Signal: Market conditions can change rapidly, and prices will break through the expected level of support or resistance.