Fibonacci

Before reading this article, look around. You’ll find a lot of symmetry in nature.

What if I tell you there is a concept that relates nature to trading? 

Sounds fantastic, doesn’t it?  

The concept is known as Fibonacci, and that’s what today’s topic is. Let’s see what it is and how to use it in trading. 

What is Fibonacci?

Fibonacci takes its name from Leonardo Fibonacci, a brilliant 13th-century Italian mathematician who introduced the sequence to the Western world. 

The Fibonacci sequence starts with one, and each subsequent number is the sum of the two preceding ones. Thus, it goes like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, and so on.

How Fibonacci relates to trading?

In the financial world, the application of Fibonacci revolves around the idea that market movements might mimic the patterns found in nature. 

In the 1970s, some stock traders began to explore this concept, giving birth to the practice of incorporating Fibonacci numbers into price charts through a tool called Fibonacci retracements.

Fibonacci retracements are utilized to identify potential support and resistance areas on a price chart using specific percentages derived from the golden ratio. The key levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%. 

Each of these percentages corresponds to a Fibonacci number divided by another number in the series, creating a sequence of ratios that have proven meaningful in trading analysis.

For instance, the 38.2% level arises from dividing a Fibonacci number by the number found two places to the right, and the 23.6% level emerges from dividing it by the number found three areas to the right. 

Though the 50% level is not an actual Fibonacci number, many traders still regard it as significant.

Now all of this seems interesting, but how can you apply Fibonacci in trading? This brings us to our next section. 

How to apply Fibonacci? 

Using Fibonacci in trading involves applying the Fibonacci retracement tool to identify potential support and resistance levels on a price chart. 

Here’s a step-by-step guide on how to use Fibonacci in trading:

Identify a Price Trend

Before applying Fibonacci retracements, it’s essential to identify a clear price trend in the market. Trends can be either upward (bullish) or downward (bearish). You can use trendlines or moving averages to help determine the trend direction.

Select the Swing Points

Once the trend is identified, select two significant swing points on the chart. Pick the lowest point (swing low) and the highest point (swing high) within a specific time frame for an upward trend. 

In a downward trend, it’s the opposite: select the highest point (swing high) and the lowest point (swing low).

Apply the Fibonacci Retracement Tool

Most trading platforms offer a Fibonacci retracement tool that you can use to apply the Fibonacci levels to the price chart. 

Click on the tool and drag it from the swing low to the swing high (in an uptrend) or from the swing high to the swing low (in a downtrend).

Analyze the Fibonacci Levels

After applying the Fibonacci retracement tool, the chart will display several horizontal lines representing the key Fibonacci levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. 

These levels are calculated based on the golden ratio and its inverse. The 50% level is not a Fibonacci ratio but is included due to its significance in trading.

Final thoughts

So, there you have it! Fibonacci is not the holy grail of trading (nothing is). But still, it provides some level of clarity to understand price movement. 

If you are a beginner, use our guide again and practice drawing Fibonacci on the demo account. 

This way, you can find critical levels and take trades accordingly. 

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