Fibonacci arcs. Theory and practical use for bitcoin forecasts.
Dear friend, I decided to comply with the request of my dear readers and tell about Fibonacci arcs in my first training article of 2018.If you try to draw them on your own, then, with default settings, it will look like this:
That is drawn like usual Fibonacci retracement levels.
(see below)
To do this, we need two extremes (high and low in the given period within a trend) and connect them with a line.
Unlike Fibonacci retracement levels, the arcs will look like curves extending out from the center of the connecting line.
So, if you draw Fibonacci retracement levels from the center of the given trend, the levels marked will intersect tangentially the Fibonacci arc.
The circles, themselves, have the same features as retracement levels and mark key support and resistance levels in the chart.However, the arcs mark key points on the axes not only in the plane of price, but also in that of time.
So, we can look into future and anticipate the cryptocurrency price move.It is obvious, that we use Fibonacci arcs not mainly to find out the levels within the given trend, but to identify their projections, extended in the future.
By default, these levels are trend projections in the ratio of 1.618, 2.618, 3.618, 4.236, 4.618.
As we see in the chart above, the circle at level 1.618 is strong resistance level.The price curve had been moving parallel to the circle for quite a long time, without even touching it.Then, after the intersection, the trend apparently changed its direction, and the market started trading flat.Having intersected the arc at level 2.618, bitcoin ticker again made a pulse rise and changed the trend direction.So, to some it up, we can say that Fibonacci arcs have the following features:
- Identify support and resistance levels, based on price and time
- Mark in the coordinate plane the zone of probable trend reversal
- Mark the zone of probable directional impulse price movement
Now, it’s going to be the most interesting part of the article, where I would like to share my experience of this tool application.
All Fibo tools fans are likely to know that Golden Ratio was used to calculate Fibo levels.But I wanted to study the way, the levels were calculated, more thoroughly.
As result, the first thing to surprise me was the information, that technical analysis uses rounded values of the golden ratio. In fact, the golden ratio is not 1.618 but 1.61803398874989. Besides, the figure has an inverse value, 0.618033988749895 (in Fibonacci tools, it is level 0.618).
It seems to be unimportant, as the values are rounded only to ten thousandth.However, all the other Fibo levels are calculated based on the gold ratio direct and inverse values, and these values’ derivatives have far more significant deviations.
As a result of my own calculations, I found the following Fibonacci levels:
Definition | value
Inverse golden value | 1.127838486
Inverse golden value | 1.27201965
Golden ratio | 1.618033989
Inverse golden value | 2.058171027
Golden ratio | 2.618033989
Inverse golden value | 3.330190677
Golden ratio +1 | 3.618033989
Golden ratio | 4.236067977
Golden ratio +1 | 4.618033989
Inverse golden value | 5.388361704
Golden ratio +1 | 5.618033989
Golden ratio +1 | 6.618033989
Golden ratio | 6.854101966
Golden ratio +1 | 7.618033989
Golden ratio +1 | 8.618033989
Inverse golden value | 8.718552381
Golden ratio +1 | 9.618033989
Golden ratio +1 | 10.61803399
Golden ratio | 11.09016994
Inverse golden value | 14.10691408
Golden ratio | 17.94427191
Inverse golden value | 22.82546647
Golden ratio | 29.03444185
Inverse golden value | 36.93238055
Golden ratio | 46.97871376
Golden ratio | 76.01315562
They are divided into three types:
- Level, identified according to the golden ratio
- golden ratio level + one (this level often works in practice)
- level, identified according to inverse golden ratio
These levels are obviously more numerous, than toolbox can include, so when drawing Fibo arcs, it is important to identify those levels, which will indicate future changes most accurately.
As for any other technical analysis tool, the signals’ relevance is checked with the chart retrospective, that is with historical data.To do this, when drawing the arcs, one should select the levels, which show the past changes most accurately.
Although, this rule isn't 100% accurate, as any other rule in technical analysis, in practice, that arc is the most important key point, which marked the strongest trend change in the past.Another way to find out the strongest levels is trend levels decomposition. For this, Fibo arcs are drawn both for the global trend lines and the local, and microtrend ones.
Points, where there are arcs from different trend levels are by definition stronger, than points with single arcs.
This is how it looks like in practice
First, I draw Fibo arcs in the weekly chart.
To do this, I use bullish trend from early 2016 up to the all-times high at $20 000
To make sure, these levels work, I checked each of them in detail in the retrospective of bitcoin price move.I won’t illustrate the check of each level, you can do it by yourself.
As an example, I will show the check of levels 4.236, 3.618 and 3.33
As you see in the chart above, 4.236 and 3.618 are quite exactly coincide with the starting point of a rising wave, and level 3.33 is accurately at the border, ahead the correction start.
That proves these levels to be quite strong and likely to become key points for the trend reversal in future.
Then,I draw the arcs in 4-hour chart.
As we see, each of the identified arcs, in the chart above, marked the start of a new local trend in the past.
For example, 1.618 perfectly worked out both in the past and recent correctional moves, having indicated the trend reversal.
When compared to the others, the weakest of the presented arcs is 2.618, as the pulse movement after it was quite weak in the retrospective. This fact needs to be borne in mind for the future forecasts.
At the final step of building a decomposition model, I draw Fibo arcs in an hourly chart.
To do this, I chose the most complete correctional wave.
In the chart above, I removed all the arcs, worked in the past, and deliberately marked the arc at level 3.618.
As we see, in the retrospective, it marks a rising wave with a strong momentum, and now, being at the intersection with arc 2.058, it creates a rather strong key point, which turns out to be a strong momentum. I want to emphasize, that Fibo arcs themselves, as other tools named after this great mathematician of the 13th century, are not buy or sell signals.
They can become a good addition to any trading strategy.If a buy signal coincides with Fibonacci arc intersection, then it makes the signal to be extremely likely to work out.In our case, indicators show different directions, so it’s too early to speak about the momentum direction.
However, the only fact of momentum, more precisely, its direction, will be a signal to enter the market and ride a new wave, which is just starting.
Good luck and good profits for all!
Regards,
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The original of my article is available at liteforex.com
Disclaimer: No information presented in this article is a guarantee of obtaining a certain return on investment as well as a guarantee of stability in the amount of possible costs associated with such investments. Materials should not be considered as informing about possible benefits. A certain profitability in the past is not a guarantee of profitability in the future. The responsibility for making an investment decision as well as the risks of losses each takes on itself.
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