One of the most widely followed mathematical indicators in cryptocurrency trading - the Fibonacci - is based on the Golden Ratio commonly observed throughout nature, and suggests that following a clearly defined trend move, the market retraces a certain percentage of the directional move.
Trend move retracements are often observed at the roughly one third and half level, meaning that approximately one third to half of an up or down move can be given up in the ensuing retracement.
Fibonacci retracements are defined more precisely at the 38.2%, 50%, 61.8% levels, producing key support/resistance levels. The ratios are based on the Fibonacci numbers, in which each successive number is the sum of the two previous numbers.
e.g. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
A number of relationships exist between these numbers, such as the fact that any given number (after 3) is roughly 1.618 times the previous number.
Changes in trends tend to take place near the lines created by Fibonacci related technical indicators such as Arcs, Fans, Retracements and Time Zones.
Fibonacci lines are drawn by connecting the beginning of a large move to its end. The Fibonacci can be drawn by connecting the lower shadow of the lowest candlestick (in the price move), to the upper shadow of the highest candlestick.
Drawing Fib lines is not an exact science, and some discretion should be allowed for connecting the top and bottom of candlestick bodies as opposed to candlestick shadows.
Massive up moves such as the one exhibited by Bitcoin (BTC/USD) in 2017 above tend to pullback quite steeply eventually, and is at the time of the chart capture, trying to find support at roughly the 78.6% Fib retracement support level (as calculated by assuming the rally began at the start of 2016 and ended with the December 2017 peak).
If the rally start was assumed to have begun several years earlier, at a level below where BTCUSD was at the start of 2016, the 61.8% Fib support is only slightly lower than as illustrated in the chart above.
Darren Chu, CFA
Darren Chu, CFA, is the founder of Tradable Patterns, publisher of daily technical analysis on Bloomberg, Thomson Reuters, Factset, Interactive Brokers, Inside Futures, and other partner websites. Before the launch of Tradable Patterns, Darren served as IntercontinentalExchange | NYSE Liffe's country manager for Australia, India, and the UAE, expanding his role to look after Liffe business development in APAC ex-Japan/Korea until his departure mid April 2014. Previously, Darren was with the TMX Group | Montreal Exchange, marketing Canadian futures and options across North America, London, Singapore and Hong Kong. Darren also launched and managed CMC Markets Canada's Chinese marketing and sales team, along with educational offering. Visit www.tradablepatterns.com for more information.