Drawing Fibonacci Retracement Areas on Upward Bitcoin Trend & Downwards Bitcoin Trend
The price of BTCUSD does not move up or down in a straight line. Instead price of Bitcoin moves up or down in a zigzag pattern. Fibonacci Retracement is the tool used to calculate where the zigzag will stop. The pullback levels are 38.2%, 50% and 61.8%. These points form the levels at which the market is likely to make a retracement.
What's retracement? A retracement is a pullback of the price before the market resumes the original trend/original direction of movement.
Example of Zigzag Movement: The Example below shows price moving up in a zigzag pattern.
The diagram below shows this movement in an upward trending market.
1-2: Price moves up2-3: Price Pullback3-4: Price Moves up4-5: Price Pullback5-6: Price Moves up
Since we can spot where a pullback starts on a Bitcoin price chart, how do we know where these pullbacks/retracements will reach?
The answer is we use Fibonacci retracement areas
This is a type of line study used in Bitcoin trading to predict and calculate the price retracement levels. This Fibonacci retracement indicator is placed directly on the Bitcoin price chart within the MT5 platform provided by your online broker, This Fibonacci retracement levels indicator will then automatically calculate these price retracement levels on the BTCUSD chart.
What are the Fibonacci Retracement Levels? 23.6 % Fibonacci retracement level38.2 % Fibonacci retracement level50.0 % Fibonacci retracement level61.8 % Fibonacci retracement level
38.2 % and 50.0 % Retracement Areas are the most commonly used and most of the time this is where the price pullback will reach - with 38.2 % Fibonacci retracement level being the most popular and the most widely used.
61.8% Fibonacci retracement level is also commonly used to set stops for trades opened using this strategy - because price retracement will not get to this retracement level most of the time.
This Fibonacci retracement levels tool will be drawn in direction of the Bitcoin price trend as explained in the examples below.
How to Draw Fibonacci Retracement Areas on an Upward Market Trend
In the diagram below the Bitcoin price is moving up between 1 and 2 then after 2 it retraces down to 50.0% Fibonacci retracement level pull back level then it continues moving up in the original upward trend. Notice that this indicator is drawn from point 1 to point 2 in direction of the Bitcoin price trend (Upwards trend).
Because we know this is just a retracement/pullback based on our experience using this indicator - Fibonacci retracement level, we put a buy order just between the levels 38.2% and 50.0% retracement levels and our stop loss just below 61.8% pull back level. If you had put a buy at this point in the trade example below you would have made a lot of profit as shown below.
Fibonacci Retracement Levels Drawn on an Upward Bitcoin Price Trend
Explanation for the Above Fibonacci Retracement Setup Trade Example
Once the Bitcoin price hit the 50.0 % Fibonacci retracement level, this zone provided a lot of support for the price, and afterward market then resumed the original upwards trend & continued to move up.
23.6 % Fibonacci retracement level provides minimum support and is not an ideal place to place an order.
38.2 % Fibonacci retracement level provides some support but price in this example continued to retrace up to the 50 % retracement level. Most of the times traders will place their buy limit orders at this level - 38.2 % Fibonacci retracement level.
50.0 % Fibonacci retracement level provides a lot of support and in this example, this was the ideal place to place a buy order.
For this example, the retracement reached the 50.0 % pull back level, but most of the time the market will retrace up to 38.2 % and therefore most of the time Bitcoin traders will set their buy limit orders at the 38.2 % Fibonacci retracement level, while at the same time placing their stop loss order just below 61.8 % Fibonacci retracement level.
How to Draw Fibonacci Retracement Areas on a Downward Market Trend
In the diagram below the market is moving down between 1 and 2, then after 2 it retraces up to 38.2% Fibonacci retracement level and then it continues moving down in the original downward trend. Notice that this Fibonacci retracement technical indicator is plotted from point 1 to point 2 in direction of the Bitcoin price trend (Downwards trend).
Because we know this is just a pullback we put a sell order at 38.2% Fibonacci retracement level and a stop loss just above 61.8% Fibonacci retracement level.
If you had put a sell order at the 38.2 % Fibonacci retracement level as shown on the trade below you would have made a lot of profit afterwards. In this trade the retracement reached 38.2% Fibonacci retracement level and did not get to 50.0% Fibonacci retracement level. From experience it is always good to use 38.2% Fibonacci retracement level when trading BTCUSD cryptocurrency because most times the pullback does not always get to 50.0% retracement mark.
Fibonacci Retracement Levels Drawn on a Downward Bitcoin Price Trend
Explanation for the Above Fibonacci Retracement Setup Trade Example
The above example is the perfect setup where the price retraces immediately after touching the 38.2 % Fibonacci retracement level.
This Fibonacci retracement level provided a lot of resistance for the price pullback; this was the best place for a Bitcoin trader to place a sell limit order as the market quickly moved down after hitting this 38.2 % Fibonacci retracement level. For this trade a trader would have put their stop loss order at the 61.8 % Fibonacci retracement level.
