Fibonacci

What is fibonacci and why is it imprtant in trading?

In you are already in trading and using technical analysis, you might have heard something about Fibonacci. In this section we will explain you what Fibonacci is and we will show you how to use Fibonacci for your profitable trading’s.

What is Fibonacci?

The Fibonacci numbers are based upon the Fibonacci sequence that was discovered by Leonardo de Fibonacci de Pisa in the 13^th century. In the trading the markets, the Fibonacci numbers are being used as ratios to measure retracements and extensions of a markets up and down movement to provide additional levels of support or resistance and hence potential turning points.

What are the Fibonacci ratios?

In trading the Fibonacci golden ratio is 1.618 and the inverse is 0.618. All other Fibonacci levels are derived from the Golden Ratio. The golden ratio of Fibonacci can be found everywhere in our life and world.

For example:

You can find the Fibonacci golden ratio in the Pyramids
DNA molecules in our fingers

Theses Fibonacci relationships levels can help us to analyze a similar cycle growth patterns in price actions. Basically it means that we constantly are measuring Fibonacci retracements and Fibonacci extensions.

To measure Retracements traders use the following numbers:

382 (38%)
50 (50%)
618 (61.8%)
786 (78.6%)
886 (88.6%)

To measure Extensions traders use:

13
272
618
2000

How do I make money with Fibonacci in trading the markets

A trader who uses Fibonacci makes money by using the Fibonacci retracements and the Fibonacci extensions.

So what does this Fibonacci retracement for us?

The Fibonacci retracement helps us to identify the location where the retracement is coming to an end and where an impulse is about to start. Basically it is helping you find a good trading entry for trading with the trend.

And what does a Fibonacci Extensions do for us?

The Fibonacci extensions help us to identify the price location of where an impulse is coming to an end and where a new retracement is about to start. Basically it is helping you to find a good price point to exit your trades that are based on trend trading.

Placing sell trades at the Fibonacci retracement levels that were reached would have resulted in 100% successful trades, assuming the stop losses were placed just beyond the 100% retracement level (see chart above). But they would not have been successful if you choose the wrong high / low swing points to measure the Fibonacci retracements or you got the direction wrong.

Let’s look at some examples:

Choosing the Wrong High / Low to Measure the Retracement

Had we chosen a slightly earlier high than point “A” used in PART 1, the 38.2%, 50%, and 61.8% retracement sell trades would all have been unsuccessful.\

Getting the Direction Wrong

Had we gone just three days further back on the GBPUSD 1 hour chart than we did in PART 1, we likely would have been looking for Fibonacci retracement buy trades on the move down from the highs. The results of our first few trades would have been all buy trade losers instead of all sell trade winners like in PART 1.

Wait for the price to start declining to be sure it’s a good Fib level to sell?

Some traders find it inconvenient or undesirable to watch the market. They prefer to trade rotisserie style (set it and forget it). Most institutional traders prefer to watch the market and adjust their trade ideas and their open trades to the changing market conditions. For them, waiting for a possible Fib sell idea to start to work before entering the trade is business as usual.

What have your learned?

In this section have learned what Fibonacci are and how to use them to make money. Make sure don’t just use only Fibonacci but use it in combination with others too like horizontal levels, trend lines and so on. The bigger the combinations are, the higher the chance of making a profitable trade.

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What is fibonacci and why is it imprtant in trading?

What are the Fibonacci ratios?

How do I make money with Fibonacci in trading the markets

Let’s look at some examples:

Choosing the Wrong High / Low to Measure the Retracement

Getting the Direction Wrong

Wait for the price to start declining to be sure it’s a good Fib level to sell?

What have your learned?

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Fibonacci

What is fibonacci and why is it imprtant in trading?

What are the Fibonacci ratios?

How do I make money with Fibonacci in trading the markets

Let’s look at some examples:

Choosing the Wrong High / Low to Measure the Retracement

Getting the Direction Wrong

Wait for the price to start declining to be sure it’s a good Fib level to sell?

What have your learned?

Share this entry

Table of contents

Learn how to make money by reading our trading articles

The Bigger Picture of the Foreign Exchange London

Online trading: understanding the business from all the angles

Trading techniques: study trends and swing the stock market

Daytrading With Stocks: 8 Strategies For Beginners

Plus500 Review: Is Plus500 a good broker?

Dividend stocks: a way to build a passive income

The Top 5 Most Promising ICO’s of February

Investing in ICO’s : Ten things that every investor needs to know

Bitcoin Private: A Cryptocurrency Review

Litecoin’s Development: How Did it Perform This December?

Tutorial: How to Buy and Sell Apple CFD Stocks on Plus500

Plus 500 Tutorial: How to Buy and Sell Facebook (CFD) Stocks

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Contact 101 Trading

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