Fibonacci in TA, explainedWhat is Fibonacci in technical analysis?

Fibonacci levels show where a price is likely to correct. On this page you'll read what the sequence is, how to draw the lines on your chart and how to use them when analysing bitcoin and other coins.

A price chart never moves in a straight line. After a strong rise or fall there is almost always a correction, a temporary move against the trend. Fibonacci levels are fixed percentages that help predict roughly how far such a correction can reach.

The main levels are 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 78.6 percent. Many traders draw these lines on their chart and place their buy or sell orders there. Because so many parties use the same zones, the effect becomes self-reinforcing.

Leonardo Fibonacci was an Italian mathematician who around the year 1200 described a simple number sequence. That sequence produces ratios that appear strikingly often in nature: in the spiral of a shell, in the petals of a sunflower, in galaxies and in the proportions of the human body. Even the composition of the Mona Lisa is said by art historians to be based on these ratios.

What makes it interesting for traders: the same ratios also turn out to be useful for analysing price movements. Not because the market is "mathematical", but because enough participants follow the levels, and that creates the self-reinforcement mentioned above.

The sequence starts with 0 and 1. Every following number is the sum of the two before it:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, ...

Divide a number by the next number in the sequence (55 ÷ 89, for example) and you land around 0.618. Divide two places further (55 ÷ 144) and you get around 0.382. This stays consistent throughout the sequence. That's how the familiar percentages for technical analysis come about:

• 23.6 percent, a small, shallow correction
• 38.2 percent, a common correction level in a strong trend
• 50 percent, not a "real" Fibonacci, but widely used as a psychological midpoint
• 61.8 percent, the "golden ratio", often the deepest point of a correction
• 78.6 percent, a deep correction, the trend is wobbling

Almost all charting software (TradingView, Coinigy, Bitstamp Pro) has a Fibonacci tool built in as standard. You pick two points, a high and a low, and the software draws the horizontal lines between them automatically.

In a downtrend you draw the line from the last high to the last low. The Fibonacci levels then sit above the low. Those levels indicate how far a possible upward correction can reach before the decline continues.

In an uptrend you draw the line from the last low to the last high. The levels now sit below the high. They indicate where a downward correction can stop before the rise resumes.

Important: the price doesn't always stop exactly on a Fibonacci line. See the levels as zones where a reversal is more likely, not as hard boundaries.

The biggest mistake beginners make: picking a random high or low. The Fibonacci levels are then meaningless. A good high or low can usually be recognised by a combination of signals:

1. Trend line break. A rising trend line that gets broken can mark the end of an upward move.
2. Support and resistance zones. A previously important level that is retested or broken.
3. Moving average crossover. A short MA cutting through a long MA, for example, a classic reversal signal.
4. Candlestick patterns. Patterns like the hammer, doji or engulfing can announce a reversal.

The more signals that coincide at the same point, the more likely it really is a valid high or low. That's why Fibonacci levels only gain real value in combination with other TA tools.