Trading with Fibonacci Numbers

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 huge subject with many different Fibonacci studies with strange-sounding names.

Let us begin by introducing you to the guy himself, Leonardo Fibonacci

Fibonacci was a mathematician who developed the Fibonacci sequence.

Leonardo Fibonacci isn't a well-known chef. He was, in fact, a well-known Italian mathematician who was also renowned as a super-duper uber-duper uber-duper uber-duper uber-duper uber-duper uber-duper uber-duper uber

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 ratios are derived from the following series of numbers: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on...

Starting with 0 and 1 and adding 0 + 1 to produce 1, the third number, is how this series of numbers is derived.

After that, add the second and third numbers (1 + 1) to get 2, then the fourth, and so on.

When you measure the ratio of any number to the next higher number after the first few numbers in the sequence, you get.618.

34 divided by 55, for example, equals. 618.

When you divide two numbers by their ratio, you get. 382.

For instance, 34 divided by 89 equals 0.382.

You've just gone through the Fibonacci Sequence!

Fibonacci Numbers

A Fibonacci sequence is created by adding two numbers, any two numbers, to get a 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.

The last number divided by the second-to-last number is approximately equal to 1.618.

Because this ratio may be found in a variety of natural objects, it is known as the golden ratio.

It can be found in a variety of places, including geometry, art, architecture, and even Sonic the Hedgehog.

The golden ratio, like pi, is an irrational number that is typically represented by the Greek letter phi (φ).

Okay, enough with the jargon.

You could put an elephant to sleep with those figures. Let's go right to the point: these are the percentages you MUST know:

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 date.

Fibonacci retracement levels are based on the concept that following a large price move in one direction, the price will retrace or return to its original position.

Before restarting in the original path, the price drops to a previous price level.

Fibonacci retracement levels are used by traders as potential support and resistance levels.

The support and resistance levels tend to become a self-fulfilling prophesy since so many traders watch them and place buy and sell orders on them to start trades or place stops.

The Fibonacci extension levels are used by traders 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 levels to your charts.

A swing high is a candlestick that has at least two lower highs on each sides of it.

A swing low is a candlestick that has at least two higher lows on each sides of it.

Have you gotten all of that？ Don't worry; in the coming classes, we'll go over retracements, extensions, and, most importantly, how to use the Fibonacci tool to capture some pips.