INTRODUCTION TO FIBONACCI TRADING
Fibonacci trading has long existed and is a fairly accurate way to trade the markets. It is often used in trading stocks, currencies and futures markets since the stock markets can be unpredictable, it’s important as traders to have a specific trading plan and rules. This will allow you to let the market move freely and allow you to stay disciplined to do the right thing every time.
People who are interested in the markets are always looking for new and better ways to analyze price so they can become more profitable. Fibonacci ratios and Fibonacci patterns is a great way to find areas where markets may look to find support or resistance and even at times find areas where they may reverse a trend.
As you do more research on Fibonacci trading strategies, you will notice that most trading software has Fibonacci tools built into their platforms. This is because Fibonacci ratios exist in all markets and all time frames. What’s key is that in order to use them effectively, you need to have a solid trading plan, a set of rules, and you have to be disciplined in executing your setup on every single trade.
WHO OR WHAT IS FIBONACCI?
Leonard Fibonacci, also known as Leonardo of Pisa, was a famous Italian mathematician who discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.
The sequence of the Fibonacci numbers is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 … and goes to infinity. Starting with zero and adding 1 begins the series. The calculation takes the sum of the two numbers and adds it to the following number.
After the first few numbers in the sequence, if you calculate the former by the latter number to that of the next higher number you’ll get .618. For example, 55 divided by 89 equals .618.
Here are a couple more examples:
89 ÷ 144 = .618
233 ÷ 377 = .618
.618 is known as the golden ratio or golden mean. If we reverse the procedure and divide the latter by the former, we get 1.61804. These numbers are reciprocals of one another.
Fibonacci Retracement Levels
0.382, 0.500, 0.618, 0.786
Fibonacci Extension Levels
1.272, 1.414, 1.618
We use Fibonacci retracement levels to find predictive areas of support and resistance. Since so many traders watch these same levels and place buy or sell orders on them to enter trades, the support and resistance levels become areas of typical reversal.
We also use the Fibonacci extension levels as profit taking levels and to find predictive price movement. Again, since so many traders are watching these levels and placing buy and sell orders to take profits, this strategy typically works for determining expected price movement.
FIBONACCI RETRACEMENT
When the market is in an uptrend, the general idea is to buy a pullback to a Fibonacci support level.
The Fibonacci Retracement tool can be used on every market and in every timeframe as seen here is this example of the Nifty and Bank Nifty Market.
You’ll notice that it doesn’t matter which market you are looking at. Fib Retracements exist everywhere. You’ll also notice from these examples, that markets typically find at least some temporary support or resistance at Fibonacci Retracement levels. However, because there are many Fibonacci Retracement numbers (.0382, .50, .0618, .0786) which ones do you buy or sell at? Where do you place your stop? Where is your target? It’s important to have specific rules for trading because there will be times when the markets will blow right past these retracement levels.
Managing Risk is extremely important and it is for this reason we’ve created rules for entry, targets and stops.
You’ll notice that it doesn’t matter which market you are looking at. Fibonacci Retracements exist everywhere. You’ll also notice from these examples, that markets typically find at least some temporary support or resistance at Fibonacci retracement levels. However, because there are many Fibonacci Retracement numbers (.0382, .50, .0618, .0786) which ones do you buy or sell at? Where do you place your stop? Where is your target? It’s important to have specific rules for trading because there will be times when the markets will blow right past these retracement levels.
Managing Risk is extremely important and it is for this reason we’ve created rules for entry, targets and stops.
FIBONACCI EXTENSIONS
Fibonacci Extensions are typically for a couple of things. We use them to find areas of confluence (which we’ll get to later) and to look for predictive price movement. If the market has started moving in a trend we typically look to take some profits at Fibonacci Price Extension Levels.
If the market has started moving in a trend we typically look to take some profits at Fibonacci Price Extension Levels. We can also use Fibonacci extensions to forecast areas of support or resistance.
The way we plot Fibonacci extension levels is with three mouse clicks.
SUMMARY OF FIBONACCI
Leonard Fibonacci, also known as Leonardo of Pisa, was a famous Italian mathematician who discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.
The sequence of the Fibonacci numbers is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and 377 … to infinity. Starting with zero and adding 1 begins the series.
After the first few numbers in the sequence, if you calculate the former by the latter number to that of the next higher number you’ll get .618. For example, 55 divided by 89 equals 0.618.
This is called the golden ratio or golden mean. If we reverse the procedure and divide the latter by the former, we get 1.61804. These numbers are reciprocals.
We use Fibonacci Retracements to find predictive areas of support or resistance. We use Fibonacci Extensions to find predictive areas for targets and areas of confluence (which we’ll get to later)
The typical retracement numbers we use are 0.382, 0.50, 0.618, and 0.786
The typical extension numbers we use are 1.272, 1.414, and 1.618
So, what can we take from this? Most Traders will agree the Fibonacci Retracements and Extensions are present in the markets. However, most Traders do not know how to properly use these tools. It is very easy in hindsight to draw Fibonacci Retracements and Extensions. It’s only when you have Rules and a Trading Plan to go with this, that you can take real advantage and be consistently profitable with them.
