How to use FIBONACCI tool on charts
When charting your own patterns for trading, the Fibonacci Retracement tool is the most easy-to-use and simplest form to understand Price Action of an asset.
Traders can easily identify setups according to relevant Support:Resistance patterns, as the tool follows the sequence of the Fibonacci sequence of numbers. It’s surprising how well the price-action of any asset that can be charted respects the ratios of Fibonacci and can clearly indicate price trend reversal, rejection level and support area.
The Fibonacci Retracement tool can be directly used natively within the CoinDCX Pro app. We will be charting WAVES/USDT on the app on different time frames.
As you can see above, the Fibonacci caught the move up perfectly in the golden pocket for WAVES/USDT on the 1H chart (lines representing the 0.618 and 0.786 levels) and it’s done a great job of catching the correction too. I find fibonacci as an underrated tool and with correct application it can be incredibly helpful.
We have two core fibonacci tools, the retracement and the extension. We are going to see the use of both below, starting with the retracement tool.
On the 4H chart we can see how the price was rejected by the 0.786 level and then on the way up got rejected 0.618 & 0.5 ratios. On the price getting rejected from the 0.382 ratio, the price then found support at 0.618 level. These kinds of levels can make trading super easy for traders.
When we understand our key levels we can add this as confluence to our bias. Here, with price approaching the range high again there was always a chance of it setting a lower high and reversing/retracing after such a powerful move. This is our fibonacci retracement in work. We take the low to the high for an uptrend and the high to the low for a downtrend.
Fibonacci Golden Ratio
The golden ratio lies at 0.618 and traders love when price visits this area as rejection or support gives a clear indication on where the price of the asset will be heading.
So once we know our key price level reaction at 0.618 we can then switch to our MTF chart (4H) and assess the strength, or lack of and make a more informed decision on where we expect price to go. Charts 1 & 2 show the fibonacci retracement tool being used from top to bottom in order to ascertain where price may react/reverse.
In the above chart, we can clearly see how beautifully the price respected the golden pocket on the Fibonacci Retracement tool. In this scenario, since the 0.618 level acted as support, price went on a clear uptrend, but if price would have got rejected at the 0.618 level, we clearly would have seen a bearish price action and downside pressure.
The 4H chart above clearly shows price closing with a bearish candle, getting rejected at range high of $34.43 level and starting a downtrend. The next support move for a price bounce could be from the 0.236 level or 0.382 if the uptrend continues. This shows the fibonacci extension tool is anchored at three points. We first take the low of the original move, then the high and the third point is anchored at the low of the corrective move that follows the high. From here it projects levels that we can target.
I always put my bias on the target area between 1 and 0.618 and we can see the price hitting the 0.618 on the chart before retracing. This also had perfect confluence with our resistance level so this became our target for taking profits. We can also see how price reacted at the golden pocket again after retracing.
This was a clear example of how you can trade better with technical patterns. Using tools like Fibs will always give you a clear indication of price action irrespective of a Bull or Bear market.
It’s also easier to trade when you can use this tool within a trading app as advanced as CoinDCX Pro. Hope you enjoyed this educational content.
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