We’ll be employing Fibonacci ratios a lot in our trading, so learn them and love them as much as you love your mother’s cuisine.
We’ll stick to two Fibonacci studies: retracement and extension. Fibonacci is a large field with many different Fibonacci studies with strange-sounding names.
Let us begin by introducing you to the guy himself, Fib…
Fibonacci was a mathematician who developed the Fibonacci sequence.
Leonardo Fibonacci isn’t a well-known chef. He was, in fact, a famous Italian mathematician. He was also famous as a super-duper uber ultra geek.
When he discovered a simple set of numbers that generated ratios describing the natural proportions of objects in the cosmos, he had an “Aha!” moment.
The ratios are derived from the numbers 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Fibonacci Sequence
A Fibonacci sequence is created by adding two numbers, any two numbers, to get the third number.
The fourth number is formed by adding the second and third numbers together again.
And you can keep doing it until it’s no longer enjoyable.
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
You won’t actually need to know how to do all of this math. All of the work will be done for you by your charting program.
However, it’s always a good idea to understand the underlying philosophy behind the indicator so you can wow your day.
Fibonacci retracement levels are based on the idea that following a large price move in one direction, the price would retrace or return partially to a previous price level before continuing in the same direction.
Traders use Fibonacci retracement levels as potential support and resistance levels.
The support and resistance levels tend to become a self-fulfilling prophecy since so many traders watch them and place buy and sell orders on them to start trades or put stops.
Traders use the Fibonacci extension levels as profit-taking levels. Due to self-fulfilling expectations, this method tends to work more frequently than not because so many traders are watching these levels to place buy and sell orders to grab profits.
Both Fibonacci retracement levels and extension level tools are available in most charting software.
You’ll need to find Swing High and Swing Low points in order to apply Fibonacci trading levels to your charts.
A candlestick has at least two lower highs on both sides of it.
A swing low is a candlestick that has at least two higher lows on each side of it.
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