Fibonacci retracements are one of the few tools that I do use in my trading. Today I will explain Fibonacci for you and show you why and how I use Fibonacci to give me an edge.
Fibonacci numbers have fascinated me ever since I first discovered them, in trading, they are like a self-fulfilling prophecy. Fibonacci numbers can be used for lots of different things and occur in nature everywhere. Today, we will just be looking at Fibonacci retracements and how I use them in my trading strategies.
What is Fibonacci
Fibonacci levels are derived from a number series that Italian mathematician Leonardo of Pisa, also known as Fibonacci, introduced to the west during the 13th century.
- 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987… with the string continuing indefinitely.
Each new number is the sum of the two numbers before it.
So when you hear someone talking about Fib levels or a Fib extension, they refer to numbers derived from the Fibonacci sequence.
You may have also heard of the Golden Ratio 0.618 or 1.618 these numbers occur everywhere in nature all the time and are derived from the Fibonacci sequence. You will find the Golden Ration in plants like the sunflower or a spiral shell, and it is also common in architecture.
Different Ways to Use Fibonacci
There are many different ways to use Fibonacci all the retracement levels are derived from that string of numbers if you take any number and divide it by the next in the sequence.
e.g. 144 ÷ 233 = 0.618 The Golden Ratio, now if you divide the same number by the 2nd number to the right in the sequence.
eg. 144 ÷ 377 = 0.382 Do these numbers look familiar? 0.618 = 61.8% 0.382 = 38.2% They are our Fib retracement levels.
Now you can use Fib extensions, Fib retracements, Fib spirals etc… there are many different ways to use Fibonacci numbers to trade, but the only one that I really use is the Fib retracement. You can experiment with the others if you like but let’s get into the retracements and see how I use Fibs.
The Fibonacci Retracements Explained
What Are Fibonacci Retracement Levels?
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. These levels are based on Fibonacci numbers. The levels are represented as a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a Fibonacci ratio, 50% is also used.
The Fibonacci retracement levels can be drawn on your chart between two levels, like a significant high and low. When drawing them on your chart, it is critical to get these anchor points right, fail to do this, and your levels will mean nothing. It is also important that you start at the correct point, you should always have your first anchor point at the earliest point in time.
If you are drawing a Fib retracement on an uptrend, your first anchor will be your low 100% and the second anchor point will be the high or 0%. It is just the opposite for a downtrend, and your starting anchor will be the high and second point the low. Please don’t get them the wrong way around.
In the example above, you can see price hit the 61.8% level and bounced off.
How I use Fibonacci Retracement
I only use Fibonacci retracements for one strategy that I use in fast-moving markets. I use them to try and identify where to enter a trade. I am using the fib levels to identify how far price might pull back to on the charts. When you start getting the hang of drawing fibs, you will be amazed at how well they work. You can watch the price hit the fib level and reverse. It is a self-fulfilling prophecy; people draw in those levels on the chart and watch them, buy or sell when it gets to these levels, making the market move.
As you know markets don’t move in straight lines even in a strong trend, they will typically have a strong move and then pullup for a rest and then move on, with the fib retracement we are trying to find these levels where price might retrace to. I am looking for a retracement to enter a trade for good value and take advantage of the trend.
One thing to remember is that there is NO guarantee that the price will stop at a Fib level; it is just an indication where price might stop. I use it to pick entry points, and the Fib levels only form part of the trading strategies I use them simply as support and resistance lines on my chart.
If there are a few anchor points that I can use I will often do that and overlay the fib levels, if you can get them to match up you will find that support or resistance will often be stronger. Now they have to line up, not be close, but when they do, they are powerful also if a Fib level lines up with a round number like $100 that can also give it more strength.
Watch the video below to see what I mean about the Fib Clusters.
Well, I hope you have enjoyed my latest post Fibonacci Retracements Explained, and it has helped you understand Fibonacci retracements a little better. The retracement is the only Fib tool that I use, a lot of people use the Fibonacci Extension tool. There really is a lot to talk about if you want to go down the Fibonacci rabbit hole, but I just wanted to give you an idea of how I use the Fib retracement in my trading.
I try to keep my trading as simple as I can. The Fibonacci retracement is one of the few tools that I do use if you want to learn more about the Fibonacci Booster strategy that I use you can start today with the Free Trading Course if you like that you can go on and Become a Master trader and learn the Fibonacci Booster Trade.
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