We’ll be employing Fibonacci ratios a lot in our trading, so master them and fall in love with them like your mother’s home cuisine.
Fibonacci is a vast field with many different Fibonacci studies with strange-sounding names, but we’ll stick to two: retracement and extension.
Let us begin by introducing you to the Fib man himself… Fibonacci, Leonardo
No, Leonardo Fibonacci is not a well-known chef. He was, in fact, a well-known Italian mathematician, also known as a super-duper uber ultra nerd.
When he discovered a simple set of numbers that generated ratios describing the natural proportions of objects in the cosmos, he had a “Aha!” moment.
The following number series produce the ratios: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
This sequence of integers is obtained by beginning with 0 and then adding 0 + 1 to get 1, the third number.
The second and third numbers are then added (1 + 1) to yield 2, the fourth number, and so on.
After the first few numbers in the series, the ratio of any number to the following higher number is.618.
For instance, 34 divided by 55 equals
When you divide two numbers by their ratio, you get. 382.
For instance, 34 divided by 89 equals 0.382.
You have just witnessed the Fibonacci Sequence.
A Fibonacci sequence is generated by adding two numbers, any two numbers, to form a third number.
The second and third numbers are then joined together to generate the fourth number.
You can keep doing this until it’s no longer enjoyable.
The last number divided by the second-to-last number is approximately equal to 1.618. Because this ratio may be found in many natural objects, it is known as the golden ratio.
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 need to know how to do any of this math. All of the work will be done for you by your charting program.
However, it’s always a good idea to be aware with the underlying philosophy behind the indicator so you can wow your date.
Fibonacci retracement levels are based on the premise that following a large price move in one direction, the price would retrace or return to a previous price level before continuing in the original direction.
Traders utilize Fibonacci retracement levels to identify probable support and resistance levels.
Because so many traders monitor these levels and put buy and sell orders on them to initiate trades or set stops, the support and resistance levels tend to self-fulfill.
The Fibonacci extension levels are used by traders as profit-taking levels.
Again, because so many traders are watching these levels to place buy and sell orders to take profits, this method is more likely to succeed than not owing to self-fulfilling expectations.
The majority of charting software offers Fibonacci retracement and extension level capabilities.
To use Fibonacci levels to your charts, you must first determine the Swing High and Swing Low points.
A Swing High is a candlestick that has at least two lower highs to its left and right.
A Swing Low candlestick is one that has at least two higher lows on both the left and right sides of it.
Do you have all of that? Don’t worry, we’ll cover retracements, extensions, and, most importantly, how to use the Fibonacci tool to capture some pips in the next lessons.
Next Lesson: How to Use Fibonacci Retracements