Fibonacci retracements

A Wealth of Knowledge

A tool used to measure market retracements/corrective ...


Fibonacci Levels

A very advanced and more often accurate method used by traders.

So who is Fibonacci, its, in fact, a nickname of a very extraordinary person born in the 13th Century by the name Leonardo of Pisa. He was a prominent Italian mathematician of his time as such that his Fibonacci sequence of numbers is still used today. In essence, the Fibonacci sequence appears on almost everything from biology, science, architecture, fashion, sculptures, art, etc. So tall building, skyscrapers, famous paintings like the Mona Lisa, the gift of life by Michael Angelo, the last supper, the pyramids of Egypt, the Parthenon in Egypt, vegetation, roses, leaves, rose petals, world disaster's: the cyclones (typhoons or hurricanes), human bodies, the galaxy.

What is most notable about the sequence is that, if one takes the number say of instance the sequence is as follows: 0,1,1,2,3,5,8,13,21,34, 55, 89, 144, 233. The following digits are a sum of two preceding numbers. What is most notable about these sequence of numbers is how almost each digit divided by the previous digit one will get 1.618 or close. The higher the digit is the closer the answer will be to 1.618. so for instance on the above sequence, if one took 144/89=1.6179, which when rounded off it will be 1.618. Let us try another example, 233/144=1.1680 which is just 1.618. This is then referred to as the Golden ratio. One can google the golden ratio and see how many things it applies to. By simple clicking here you will be directed to google images of things the golden ratio applies to. So how is this of relevance in trading you ask?

Fibonacci in trading

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So while the Dow theory maintains that the market will never move in a straight line, no matter what trading instrument one is trading, one can expect a retracement. It is for this reason that amateur traders close their positions although they have a potential of being a good trade, but for the reason that the market appears to be going against them for that time, beginner traders will then close their positions and walk away with only but a small fraction of the profits they stood to make. So while the Dow theory maintains this fact, Fibonacci serves as a tool to measure how much the market will retrace, how far the market will retrace. This is where the golden ratio comes in. We use the Fibonacci retracement levels in determining how far will the retracement go. Study the diagram provided below and observe just how one draws Fibonacci retracements.

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We always draw our Fibonacci retracement from point A to B]] The Fibonacci retracement tool comes with different retracement levels. However, the most used retracements are the 38.2, the 50, and the 61.8. These mentioned retracements are the most used in trading as such that the market retraces onto the above-mentioned retracements most of the time. This becomes a self-fulfilling prophecy in such that an informed trader draws their Fibonacci from point A to point B, to know where point C/A is going to be. A trader will then wait patiently, anticipating that the market will retrace back to the zone between the 50 and the 61.8 retracements. This then becomes a case in most cases. So a fib zone will be a good place to enter a trade. A fib zone is a place or a zone between the 50 and 61.8, which is where the market retraces to about 80% of the time. Fibonacci alone is not enough although it is where the market retraces to 80% of the time. One should use other aspects of trading to compliment his stance on a trading instrument whether bullish or bearish.

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One needs to know the trend first before drawing their Fibonacci because how is one going to draw it without knowing the trend the market is moving in. Fibonacci is drawn according to trend, so in a downtrend, one would draw it from top to bottom but always from point "A" to point "B". While the picture depicts how to label your waves the following illustration serves to indicate that how one should go about labeling their chart using the A to B to find C which is the retracement. On a downtrend, the fib zone is drawn the opposite direction than one would in an uptrend. study the picture below as it shows where is point A and B in a downtrend.

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Now look how this is applied on live charts, at point "C" is where one should look to get in on the markets. Point C is where the retracement ends and an impulse begins, hence this point becomes an ideal place to enter at. The chart below was taken on AUD/USD daily chart. To determine where point "C" is most likely to be, the Fibonacci retracement tool was drawn from point A to point B just as illustrated in the picture. This phenomenon becomes a self-fulfilling prophecy in such that one draws their Fibonacci from point "A" to point "B" anticipating that the market will reverse when it gets to the fib zone. This is most likely to be the case.

Now the question becomes how would one draw the Fibonacci levels on a downtrend. Using, drawn and labeled diagram at the top of this page one will understand where "A" and "B" is. Which is where we draw our Fibonacci levels from and to. So using that analogy, look at USD/JPY, how one would have drawn it in a downtrend.

Fibo in a downtrend.png

Fibonacci levels with stochastics

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Fibonacci levels alone are good, but with a stochastics, they are even better. Stochastics oscillator only serves as a tool of confirmation, whether or not it is safe to enter. Upon finding where point "C/A" is going to be, one may also load the stochastics indicator to aid them in entering a trade. So, one knows the overbought and oversold strategies offered by the stochastics indicator. Depending on the trend, one may wait for the indicator to get either overbought or oversold, the wait some for those two stochastics lines to cross either the 20 or 80 parameters. After that happening one can place a trade, in a fib zone and a stochastics confirmation. One can access stochastics strategies here It should be known that trading is all about probabilities, so using the stochastics to compliment your trader will put the odds in your favour given that everything else is aligned perfectly, being the overall trend, support, resistance, trendlines, candlestick patterns, Fibonacci levels (fib zone to be exact) and the stochastics to confirm. The picture below illustrates how everything must be aligned together in order for one to enter a trade.


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