Technical analysis

Fibonacci tools in technical analysis use mathematical ratios to mark potential support and resistance zones on a price chart. They're based on the Fibonacci sequence, in which each number is the sum of the two before it, but they can't predict the path of a cryptocurrency with certainty.So how did we get from a sequence of numbers to the lines you see on Bitcoin charts? We think Fibonacci is interesting as a tool for organizing your analysis. The problem starts when we ask it to work like a crystal ball.What is the Fibonacci sequenceThe Fibonacci sequence usually starts at 0 and 1 and continues like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… The rule never changes: add the two previous numbers to get the next one.For example, 8 comes from 3 + 5, 13 from 5 + 8 and 21 from 8 + 13. In mathematical notation the rule is written as F(n) = F(n−1) + F(n−2), with starting values F(0) = 0 and F(1) = 1.You'll often see it called the “Fibonacci series.” The more accurate term here is sequence, because we're talking about successive numbers, not their sum. Some presentations start it at 1, 1, which doesn't change the rule.Who was FibonacciFibonacci, also known as Leonardo of Pisa, was an Italian mathematician of the Middle Ages. His work helped spread the Hindu-Arabic numerals and the decimal place-value system in Europe, at a time when calculations were often done in far more cumbersome ways.The sequence became linked to his name through a math problem about breeding rabbits. It wasn't, however, created by a stock market analyst, nor was it designed to predict prices. Similar numerical relationships had been studied even earlier in the Indian mathematical tradition.The golden ratio and Fibonacci ratiosIf you divide a number in the sequence by the one before it, the ratio gradually approaches 1.618…, the golden ratio. For example, 89 / 55 gives roughly 1.618. If you flip the division, the result approaches 0.618, or 61.8%.Related divisions give other ratios too. Dividing a number by the one two places after it approaches 38.2%, while dividing by the one three places after it approaches 23.6%.Fibonacci numbers show up in some plant growth patterns, such as the arrangement of seeds or leaves. That doesn't mean every seashell follows the golden ratio or that planetary orbits are described by the sequence. And above all, the presence of a pattern in nature doesn't prove that a market must follow it.How Fibonacci works in cryptoThe most common application is Fibonacci retracement levels. The analyst picks a completed move between a low and a high, and the tool splits its range into percentage levels.Think of a tape measure that shows how much of the previous rally the price has given back. The tape measures the distance; on its own, it doesn't explain why the market is moving or where it will stop.In an upward move, the levels are used to examine potential support zones during the pullback. In a downward move, they're used for potential resistance zones during the rebound. Support is an area where buying interest may appear, and resistance an area where selling may pick up.Which levels are usedCharting tools usually show 23.6%, 38.2%, 50%, 61.8% and 78.6%, along with the endpoints 0% and 100%. The 78.6% level comes roughly from the square root of 0.618.The 50% level is not a ratio derived from the Fibonacci sequence in the same way. It's included by convention, because a retracement to the halfway point of a move is widely used in technical analysis. The 0% and 100% levels set the boundaries of the measurement.How to draw it on the chartPick the timeframe and a distinct move with a clear start and end.For an upward move, mark the low and then the high. For a downward move, mark the high and then the low.Check which way the percentages run, because the tool's settings can change how they're displayed.Read the levels as areas to watch, not as automatic trading signals.The choice of endpoints changes the result. A daily chart and an hourly chart can produce different zones, and differences also arise if you use candle wicks instead of closing prices. You need a consistent method, not moving the points every time the market disagrees with you.A Fibonacci calculation exampleLet's take a hypothetical example in which Bitcoin moves from 20,000 to 40,000 price units. The numbers are purely for illustration, not current prices or estimates. The range of the rally is 20,000 units.If you measure how far the price pulls back from the high, the calculation is: retracement level = high − (range of the move × retracement percentage).23.6% retracement: 40,000 − 4,720 = 35,280.38.2% retracement: 40,000 − 7,640 = 32,360.50% retracement: 40,000 − 10,000 = 30,000.61.8% retracement: 40,000 − 12,360 = 27,640.This is where people often get confused: a 61.8% retracement from the high is not calculated by adding 61.8% of the range to the low. Before you read any chart, check which end the percentage is measured from.How Fibonacci extensions differRetracement levels look at the pullback within the range of a previous move. Fibonacci extensions project ratios beyond that range, with 161.8% being a common example.Some extension tools use three points: the start of a move, its end and the end of the retracement that followed. These projections describe a hypothetical scenario, not a price the market is bound to reach.Risks and pitfalls in the analysisThe main limitation is that the measurement is subjective. With enough different endpoints and timeframes, you can almost always find some line close to a past reaction. That shows how easily an explanation can be fitted after the fact, not that its predictive value has been proven.A price can cut through level after level without any real reaction. News, thin liquidity or the forced closing of leveraged positions can override any geometric ratio. There's no universal success rate that holds for every cryptocurrency and every period.In practice, analysts often look at previous highs and lows, trading volume and the broader trend together. Even when these line up with a Fibonacci level, their agreement is no guarantee.Our viewThe Cryptonomy team sees Fibonacci as useful as a common language for describing a move. It lets us say how deep a correction was and which areas we're watching, as long as we clearly state the points we measured from and our caveats.For users in Greece, the chart's trading pair matters too: a crypto priced in euros is not the same chart as the same crypto priced in dollars or a stablecoin. Changes in the exchange rate can affect the picture. The mathematical precision of the calculation doesn't mean the prediction is precise.Frequently asked questionsWhat is the Fibonacci system?In technical analysis, it's the use of ratios related to the Fibonacci sequence to map out potential support and resistance zones. On its own, it isn't a complete strategy.What are the first numbers of the Fibonacci sequence?They are 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 and 55. Each new number equals the sum of the two before it.Why is 61.8% used on charts?It comes from the limit of the ratio of a number in the sequence to the next one, and it's linked to the golden ratio. Its mathematical origin doesn't guarantee that the price will react there.Does Fibonacci work on all cryptocurrencies?It can be drawn on any chart with enough data. How useful it is depends on how it's applied and on market conditions, with no guaranteed result.Does Fibonacci predict whether the price will go up or down?No. It measures the ratios of a chosen move and helps organize possible scenarios. On its own, it doesn't determine the direction of the trend or ensure that a level will hold.

Elliott Wave is a technical analysis method that interprets price movements as repeating wave patterns tied to investor psychology. Its basic picture is a five-wave move in the direction of the main trend followed by a three-wave correction, though this is no guarantee of a forecast.What Elliott Wave Theory isRalph Nelson Elliott, an American accountant, developed his theory in the 1930s by studying stock market charts. He argued that the collective behavior of investors creates repeating structures in prices, as optimism alternates with fear.Think of a rising market: some people buy early, others have doubts, and later enthusiasm takes over. The theory tries to organize these swings into waves. However, it doesn’t measure sentiment directly, nor does it prove that every fluctuation has a specific psychological cause.The name Elliott Wave Theory describes this approach. You’ll also see it called Elliott Waves, while the spelling “Elliot” with a single final t is common but doesn’t match its creator’s surname.How waves 1–5 and A–B–C workThe basic pattern consists of a five-wave motive move and a corrective phase, often of three waves. In an uptrend example, waves 1, 3 and 5 move up, while waves 2 and 4 pull back, retracing part of the previous move.The motive phaseWave 1 starts the move and wave 2 pulls back against it, without wiping out its starting point. Wave 3 continues in the main direction, wave 4 brings a new correction and wave 5 completes the five-wave structure.Note the difference: not all five waves go up. Also, a motive structure can point down when the main trend is bearish. The numbers describe the position within the pattern, not necessarily a rise.The corrective phaseAfter the five-wave move, the simplest example of a correction is labeled A–B–C. In a bull market, A pulls back, B rebounds and C pulls back again.The real picture isn’t always that neat. There are zigzags, flats, triangles and combinations of them. So A–B–C is a starting point for understanding, not a template for every chart.The basic rules of an impulse waveThe most common five-wave motive structure is called an impulse wave. For such a count to hold up, it must follow some basic rules:Wave 2 may not retrace all of wave 1 by moving back past its starting point.Wave 3 cannot be the shortest in price length among waves 1, 3 and 5.Wave 4 must not enter the price territory of wave 1.The last rule applies to the standard impulse. Diagonals have different characteristics and allow overlap. But it isn’t enough to label every problematic pattern a “diagonal” just to save our original call.A rule is one thing; typical behavior is another. For example, wave 3 often shows strong momentum, but it isn’t necessarily the longest. Likewise, the alternation between a sharp and a sideways correction in waves 2 and 4 is a guideline, not an unbreakable law.Why the count changes with the timeframeOne wave on a daily chart can contain a whole sequence of smaller waves on an hourly chart. This appearance of similar structures at different scales is called a fractal structure.Picture a map: from far away you see one main road, while zooming in reveals its bends. In the same way, a small pullback may be a correction within an uptrend, while that same uptrend may be part of a larger downtrend.That’s why the timeframe should be stated up front. Constantly switching charts until the desired pattern shows up makes the analysis harder to test.Elliott Wave and FibonacciAnalysts often combine Elliott waves with Fibonacci ratios. Fibonacci retracements measure how much of a previous move the price has given back, while Fibonacci extensions project possible proportional lengths for a following move.In practice, the ratios are used to check whether a correction or a motive move fits the hypothetical scenario. They don’t dictate where the market will stop, and on their own they don’t confirm the count.The choice of start and end points changes the measurements. If we keep moving the points so that the lines line up with the price, we are fitting the explanation to the outcome instead of testing a hypothesis.How to apply it to a chart in practiceWe believe the method is most useful for organizing alternative scenarios. A consistent reading process can follow these steps:Pick a timeframe and look at the bigger trend before focusing on the small moves.Identify the obvious highs and lows, without numbering every small fluctuation.Draw a possible count and check whether it breaks the rules of that particular structure.Write down which development would invalidate it and what alternative interpretation exists.Compare the picture with the trend, trading volume and other independent indicators.For example, if a pullback has been labeled wave 2 of a bullish structure and then drops below the start of wave 1, that count is rejected. We don’t just fix the numbering after the fact without admitting that the original hypothesis failed.What’s different with cryptoThe theory is also applied to charts of Bitcoin and other cryptocurrencies, but round-the-clock trading and sharp swings make them harder to read. A news event, thin liquidity or forced liquidations can change the picture quickly.There is also a practical detail for readers in Greece: the same cryptocurrency can show different highs against the euro and against a stablecoin. You need to be consistent about the trading pair, the data source and the timeframe.Also, a wave count doesn’t assess a protocol’s security, the quality of its team or the sustainability of a token. The technical picture doesn’t replace research into the project itself.The pitfalls and our takeThe biggest obstacle is subjectivity: two analysts can count the same chart differently. The more complex structures are brought in, the easier it becomes to find an explanation after the fact for almost any move.There is also the trap of confirmation bias. When we expect a rise, we may see a wave 3 “coming” everywhere and ignore the evidence that disagrees. The chart doesn’t owe it to us to prove our count right.The Cryptonomy team sees Elliott Wave as a useful framework for observation, not a machine for certain predictions. We think it offers more when it comes with clear invalidation rules and an honest assessment of failed scenarios. The approach above is educational and is not a trading recommendation.Frequently asked questionsWhat does Elliott Wave mean?It refers to Elliott Wave Theory. It is a technical analysis approach that looks for repeating structures in prices and links them to the collective psychology of investors.What are the five Elliott waves?In the standard motive structure, waves 1, 3 and 5 follow the main direction, while waves 2 and 4 move against it. The main direction can be up or down.Is wave 3 always the longest?No. In a standard impulse it may not be the shortest of waves 1, 3 and 5, but that doesn’t mean it always has to be the longest.Can Elliott Wave predict the price of Bitcoin?It can be used to frame scenarios, not to make certain predictions. The count is interpretive, and a price move can invalidate the original scenario.Do you need Fibonacci for the count?No. Fibonacci ratios are complementary, helping you compare moves. They don’t replace the wave rules, nor do they prove that a count is correct.