Did you know? The term Fibonacci in Fibonacci trading came from the person who discovered it: Leonardo Fibonacci. Leonardo Fibonacci hails from Italy, and he is a well-known mathematician. Little did he know that simple number series can create specific ratios that describe the universe’s natural proportions.
Simply, Fibonacci trading
Today, traders massively use Fibonacci trading, so it will also be wise to learn it and use it to our advantage. People widely used and studied Fibonacci. It became so broad that a lot of terms related to it came to life. However, we will only focus on two of the most important ones: the retracement and the extension.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144..
If you will observe and analyze the relationship of these numbers to each other, you can debunk that:
- 0+1= 1
- 1+1= 2
- 1+2= 3
- 3+5 = 8
- 8+13 = 21
- 21 + 34 = 55
If we add the first and second numbers, we will get the third number. If we add the second and third numbers, we will get the fourth number. Since numbers are infinite, we can go on and on.
Leonardo observed another thing about this series of numbers. After some numbers in this sequence, the ratio of one number to the next higher number will be 0.618. For example:
- 34/ 55 = 0.618
- 55/ 89 = 0.618
- 89/ 144= 0.618
Also, if you look at the ratio between the alternate numbers, it will always be .382
- 13/ 34= .382
- 21/ 55= .382
- 34/ 89 = .382
- 55/ 144 = .382
The Fibonacci sequence
Take any two numbers and add them to get the third number. You’ll get the fourth number by adding the second and third numbers. You’ll get the fifth number by adding the third and fourth numbers. This cycle is endless, and you can continue the sequence for as long as you like.
If you take the last number and the second to the last number, their ratio will always be 0.618. We call this the golden ratio. We can also find this in many natural objects. We will encounter this in trading and geometry, architecture, art, and many more. A golden ratio is an irrational number. We can denote it by using the Greek letter φ called phi.
Fibonacci and charting software
Let us run through some ratios that are essential keys to Fibonacci trading.
- Fibonacci retracement levels: 0.236, 0.382, 0.618, 0.764
- Fibonacci extension levels: 0, 0.382, 0.618, 1.000, 1.382, 1.618
Charting software will calculate everything. This is the basic theory of the indicator. The retracement’s theory says that as soon as a massive price moves in a direction, the price retraces or returns to a previous price level in the initial direction.
Other traders make use of these retracement levels as possible support and resistance areas. Many traders monitor these levels then make buy and sell orders on them to make trade entry or stops. These support and resistance levels only tend to become true because they are expected.
Other traders make use of Fibonacci extension level as profit-generating levels. Many traders monitor these levels as well to make buy and sell orders so they can generate profits. This tool always tends to work because traders expect them to. Charting software usually has Fibonacci retracement and extension level tools.
Swing high and swing low
A swing high candlestick has at least two lower highs on its left and right side. A swing low candlestick has at least two higher lows on its left and right. You need to identify these first before applying Fibonacci.
Thank you, Fibonacci.
Albeit the simplicity of the numbers, they made something so powerful and helpful not only in life in general but also to the world of trading. The same is true with life. Something that looks plain or simple might make a significant impact someday.