Intro 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. When searching for online courses and tutorials, it’s important to find good learning materials along with a good mentor or coach who walks through specific trade setups. 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.
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.