Get to Know the Fibonacci Trading

Get to Know the Fibonacci Trading

Among any other indicator, people place Fibonacci at a base.

But do you ever wonder what Fibonacci is?

At times it feels like traders give Fibonacci an almost mystical power.

Fibonacci Retracement is a popular tool among technical traders.

FACT: It is based on the key numbers identified by mathematician Leonardo Fibonacci in the 13thcentury. 

Learn all about the man behind the concept and what it actually means.

Background of Fibonacci Levels

This levels are from a number series that Italian mathematician Leonardo of Pisa, also known as Fibonacci, introduced to the west during the 13th century.

The sequence starts like this:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…

Each new number is the totality of the two numbers before it. As the sequence develops, each number is approximately 61.8 percent of the next amount, roughly 38.2 percent of the following number, and roughly 23.6 percent of the number after that.

Subtract 23.6 from 100, and the result is 76.4.

These are Fibonacci retracement levels: 76.4, 61.8, 38.2, and 23.6.

How to Use Fibonacci Retracement Levels

Stock chart with Fibonacci retracement indicator in monitor

When a stock is trending very sturdily in one direction, the belief is that the retreat will amount to one of the percentages included within the Fibonacci retracement levels: 23.6, 38.2, 61.8, or 76.4.

Meanwhile, some models also include 50 percent.

For example, if a stock soars from $10 to $11, the retreat should likely be in approximately 23 cents, 38 cents, 50 cents, 62 cents, or 76 cents.

Early or late in trends, when a price is still gaining or losing steam, it is more typical to see retracements at the higher percentages.

If your day trading strategy provides a short-sell signal in that price region, the Fibonacci level helps settle the signal.

The Fibonacci levels also point out price areas where you should be on high alert for trading prospects.

Using a retracement tool is subjective. There are several price swings during a trading day. This is not for everyone that will be connecting the same two points.

The two points you link may not be the two points others connect.

To compensate for this, draw retracement levels on all significant price waves, noting where there is a collection of Fibonacci levels.

This may indicate a price area of high importance.

Retracement Cautions

Two investor are making commitment in stock market.

Fibonacci levels will not always identify exact market turning points. They make available on an estimated entry area but not an exact entry point.

There is no assurance that the price will stop and reverse at a particular Fibonacci level, or at any of them. If the price repeats 100 percent of the last price wave, the trend may be in question.

If you use this tool on very small price moves, it may not offer much understanding.

The levels will be so close together that almost every price level appears important. 

Fibonacci retracements provide some areas of curiosity to watch on pullbacks. They can perform as validation if you get a trade signal in the area of a Fibonacci level. Traders don’t need to use them.

Conclusions

Play around with Fibonacci retracement levels and put them into your charts. Include them into your trading plan if you find they help your trading.

In the long run, Fibonacci is nothing more than a modest retracement level.

These levels are the only characteristic of where security could have a price reaction, but nothing is firmly established.

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