Fibonacci Retracement– The art of Trading
Fibonacci is a great tool to use in both Forex and Binary Options Trading. The Fibonacci retracement and extension studies are probably the most accurate ways of measuring support and resistance levels accurately.
Wikipedia describes the great Leonardo Bonacci or Fibonacci as “the most talented Western mathematician of the Middle Ages” He introduced Europe to a sequence of Fibonacci numbers. He popularised the Arabic numerals in the western world from 0-9.
He became very popular when he discovered ratios arising from the following sequence of number 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 etc.,
As you can imagine this series of numbers is derived from adding 0+1 = 1, 1 + 1=2, 2+1 =3, 3+2 = 5 etc,
After the first set of single numbers, if you measure the ratio between any number by its subsequent number you always get the result of 0.618
Therefore if you divide 13 by 21 you get 0.618, if you divide 34 by 21 you get 0.618 and if you divide 55 by 34 you get 0.618. This the behavioural pattern of the sequence.
To complicate or make matters more awesome, if you divide alternative numbers, you always get 0.382. Really amazing. Try it out for yourselves starting with 13 division by 34 and 21 division by 55. Bingo the pattern is unshakeable!
This is the basic teaching of “The Fibs” which are also known as the “golden mean”. However you do not need to bother your head about all these numbers and work them out for yourselves, because luckily today Fibonacci Retracement and Extension levels are tools which are incorporated in most of the Free Charting Stations.
What a trader should know that the Fibonacci Retracements Levels and the Extension Levels are both formulated on this incredible study.
Software which incorporates the Fibonacci Numbers for AutoMated Trading and Signal Software
Using the Fibonacci Retracement and Extension Levels as indictors for Support and Resistance Levels
Market movement is watched by millions of scavenger eyes all over the world at the same time. Because of this, many are buying and selling at the same time – thereby creating the prophetic support and resistance levels.
Since many traders are plotting the Fibonacci retracement and extension tool at the same levels, it follows that most traders will be using the tool as a benchmark to take profits.
If you have managed to read so far into this post you are probably asking yourself, how am I going to use this magic tool and grab some profits myself?
Well that is not that difficult once you know how! That is what we are about to reveal. As explained earlier most charting stations provide tools encrypted on their charts. What you, as a trader need to identify is the following two points. 1. The Swing High 2. The Swing Low. If you know how to identify these two points, you are on your way to understand Mr. Fibs even though he has been dead and buried some 900 years ago!
What is a Swing High? A swing high is a candlestick or pin bar that is at the very least two points higher than the candlesticks on either side of it. On the other hand a Swing Low is a candlestick, which has two higher lows than the candlesticks neighbours on both sides of it.
Fibonacci Retracement Tool and a Trending Market
First and foremost, as with most trading tools, the Fibonacci tool works best with a trending market. If you are using the Fibonacci as a Retracement Tool you will want to discover the best support level and take a “call” whilst the trade hits the “roof” or the Fibonacci resistance level. Alternately, if you are looking at the Fibonacci Extension level, you will want to discover the best resistance level, and take a “put” trade whilst watching the trade plummet to the support level.
If you are not sure what support and resistance levels are, we recommend that you read our article of this subject HERE.
How to Find the Fibonacci Retracement and Extension Levels
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
Basically, the “Fibs” need to be used either the market is on a retracement when the price hits the support line of the Fibonacci tool, and take a “Call Trade” or “Buy”. Or else take a “Put Trade” or “sell” when the extension levels have hit the resistance level with the Fibs.
So how does one find the Support and Resistance Levels with Fibonacci Tools?
Let us first consider the Retracement Levels created with the Fibonacci Golden Rule. Incidentally, the Golden Rule is true to any part of nature as well. It is the magical set of numbers which rule how rabbits are born exponentially, how the petals in flowers fall within the same number bracket, and finally the sheer perfection of the nautilus shell and its many compartments are exactly equal to the Fibonacci “golden ratio”. In forex and binary options trading this becomes a self fullfilled prophecy. Every trader is watching the Fibonacci lines and will act on them. So how are we going to join the band wagon of profit taking traders?
Let us start off by understanding the Fibonacci Retracement Levels.
The Uptrend Scenario
First you must identify the most recent “swing highs” and “swing lows”. We have already understood how to find these levels when we plotted our personal “support and resistance levels”. All you have to do is point at the highest point on your chart (or your swing high) and move your cursor to the lowest point on your chart (the swing low). This is true for a downtrend.
For an uptrend the reverse is true. This time you find your swing low, and hit your cursor and move it to the highest point of your chart ie., the swing high and end your cursor line at that point.
In the visuals presented we are showing the swing highs and swing lows for the EUR/USD earlier this week (week 28 of 2016)
As explained earlier all the main charting stations will offer the Fibonacci Tools for free to plot on their charts. In our chart, courtesy of NetDania.com we have plotted the Fibonacci retracement or retraction levels by clicking on the Swing Low and then moving the cursor all the way to the Swing High point. As you can see we have several lines which were formed by the Fibonacci Tool itself.
The Fibonacci retracement levels were at 23.6%, 38.2%, 50%, 61.8% and 76.4%
So what do these graphs tell us. Basically if we are expecting the recent uptrend between the EUR/USD to retrace, the price should find a home or support at one of the Fibonacci retraction base lines plotted on the charts. Since many traders all over the world are watching exactly the same levels as yourself, one would expect many traders to be to be buying the currency or placing call trades when the price settles at any point of the support levels created by the Fibs.
If we look at what transpired after we had plotted our graphs, it is easy to understand how plotting the Fibonacci Retracement levels would have been profitable. Once the price pulled back all the way down to the level of 38.2% it continued on its journey upwards and went literally through the roof. The price got tested at 38.2% but never fell beyond it. If anyone had put in a “call” trade or bought at the 38.2% level, he would have definitely been In the Money or made a lot of pips.
The Downtrend Scenario
In a downtrend we need to plot the Fibonacci Retracement in the opposite manner. In this case we need to find the Swing High first. Click on it using the Fibonacci tools and drag it all the way down to the Swing Low on the same chart.
The points plotted this time round are at at 23.6%, 38.2%, 50%, 61.8% and 76.4%
But in the opposite direction!
How should Traders use the Fibonacci Retracement + Support and Resistance to take trades?
When a trader is able to spot potential support and resistance levels, that is the point where a trader can enter the market and make some money.
Since many other traders are watching the same support and resistance levels, taking a trade where the price settles means that you will have a much better chance of seeing the price bouncing from that level.
The retracement level is when the price is going to pull back and give the kick back that we know happens always after a series of trending candles.
Alternatively with the extension, we know that we are looking at a trend confirmation after a pull back.
Here are examples which show us the best examples of taking trades with the Fibonacci resistance and support lines.
We now have the set ups to increase your chances of find a good entry point. Although we are looking at historical information, we can clearly see that the support and resistance levels created by the Fibonacci golden rule always held and gave us an opportunity to trade.
If you took a “down” trade or “sold” at any point in time on the ovals, you would have certainly been able to make some money trading online.
Remember that the Fibonacci numbers are not Foolproof and that they are there to give us an indication of price entries. Combining this information with other tools such as the Bollinger Bands will give you price confirmation!
Next post will be dealing with using Fibonacci Retracement with Trend Lines and Japanese Candlesticks.
The Fibonacci Retracement and Extension Rules Explained