How to use Fibonacci in trading

The Fibonacci steps relating to trades is a very special means of making markets analysis. It was Leonardo De Pisa who is very famous in the mathematics field that developed the hypothesis of the Fibonacci.

To this very time, those Fibonacci concepts are still applied in different Technical Analysis forms by traders. 1.618 is the number which represents the golden ratio. At most times, the methods of the Fibonacci is most commonly applied when identifying levels of resistance and support the Fibonacci-based methods for trading functions because they are practiced widely.

Below, is a history of the Fibonacci and how to deal in it:

Origin of the Fibonacci numbers

History has it that Leonardo de Pisa who is full named Leonardo Pisano and born at Pisa found the pattern of numbers for the Fibonacci in the year 1202. His ideas were actually from the Far East where he traveled to, although everything of the Fibonacci pattern is greatly attributed to him. He had learned the numeral system of the Hindu-Arabic which assisted him in his popular work which he had called ”Liber Abaci” and finally became the reason he was nicknamed Fibonacci. It was his works that brought about “the golden ratio.”

The Fibonacci sequence of numbers

The Fibonacci number sequences where described by Leonardo as:

0,1,2,3,5,8,13,21,34,55,89,144,233 etc.

As you count higher, you would notice the increase in the numbers by 1.618 higher than the one before it.

E.g. 144 divided by 89 is equal to 0.618.

More so, 89 divided by 55 is equal to 1.618 which is the Golden Ratio.

This Fibonacci sequence, therefore, explains that there are two major ratios which are the phi (1.618) and its’ opposite (0.618). Apart from these, another is the 0.382. It is when a number is divided by another to the right by two places that the ratio is formed. A four place move brings forth another ratio called 0.236. These four ratios are the most crucial in the technical analysis world.

Trading with the Fibonacci levels

When trading with the levels, there is to be expected from the 0.618 or 0.382 Fibonacci ratio levels, a reversal. The 0.618 and the 0.382 and other Fibonacci Ratios are probable levels for support when measuring the Fibonacci ratios in a certain uptrend. Also, the 0,618 and 0.382 and other Fibonacci Ratios become possible levels of resistance when measuring a downtrend.

You can also expect the cost values to make a turn depending totally on these levels action’s cost value. At most times you could have expectations of the cost value rally in the direction of the 1.618 when the cost value reverses to either 0.618 or even 0.382. This is what is called the extension level of the Fibonacci. This is a widely practiced principle for strategic trading as it is close to the level of the Fibonacci retracement that the traders sell or buy and also close to the extension level of the Fibonacci that profit is taken.

One should note that the Fibonacci ratios could be to whichever market and at whatever timeframe be so far there is in the market, a vehement movement. Patience is also a very crucial point one should have in order to be successful in your trades. Below is how the Fibonacci ratios are applied for a Cisco Systems (CSCO) daily chart.

How to use Fibonacci in trading

One would see in the example above where from the points of the high and low were taken and also the final retracement to the 38.2% level of the Fibonacci.

As there is evolvement in the cost value, more of the traders would likely plan Fibonacci levels. Despite that, there must be a wait by the trader for maybe few sessions till when the early stage of retracement sets in. Another major necessity is noting that the continuation of the cost value in the trend’s direction can’t be guaranteed if the cost value returns to a Fibonacci level.  Hence, Fibonacci is just “supports” and levels of resistance that traders watch widely. The Fibonacci levels representing possible variances of resistance and support is the reason they are uniquely selected by trend traders for dealings.

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