What Is Fibonacci Trading?

W

e will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mother’s home cooking.

Fibonacci is a huge subject and there are many different Fibonacci studies with weird-sounding names but we’re going to stick to two: retracement and extension.

Leonardo Pisano, nicknamed Fibonacci, was an Italian mathematician born in Pisa. As his father was a diplomat, he was educated in North Africa, where he studied mathematics and accounting. 

It sounds boring, but he actually created a universal sequence, which can be found in nature. 

Don’t underestimate his work, because his sequence can help you earn some real money!! 

What is a Fibonacci sequence? 

Fibonacci contributed to science with the so-called Fibonacci number series, which is a geometric progression. It is formed as each subsequent number is a sum of the previous two. The beginning of the series is: 

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

If we were in Fibonacci’s head, we would be thinking about rabbits and how they mate. 

Sexy? Hm… 

He presented it like this: a male and a female can produce a new pair of rabbits per unit time (eg one month) that continues to breed (the newborn pair of rabbits needs two months to give their first-generation, after which they continue to breed every month). 

What is the number of pairs of rabbits after a certain time, if they don’t die? The answer is the Fibonacci sequence.

The series has some important features. 

Each number in the series divided by the previous one gives approximately 1,618. 

Example: 13 divided by 8 is 1.625.

The opposite of 1.618 is 0.618, which is the ratio of each number in the sequence and the next. 

Example: 89 divided by 144 is 0.618

Another feature is that the alternating numbers are related to each other by a factor of approximately 2.618 and by its inversion approximately 0.382. Alternating numbers are numbers in which all digits alternate between even and odd. 

For example, 21 divided by 8 is 2.625.

And 21 divided by 55 is 0.381.

In other words, if a number in the sequence is divided by a number two numbers backwards, the result is 2,618, while if the number is divided two places further, the result is 0.382. 

The same procedure can be repeated between numbers that are quite far apart. Those that are 3 places apart give a ratio of 4.236 and vice versa – 0.236, etc.

Golden Ratio 

What really intrigued Leonardo Pisano was the ratio created by the different numbers in that sequence. 

The most important ratio is 1,618, also known as the golden ratio. Each number in the series is 1,618 times larger than the previous one. 

For example: 89 is 1,618 times greater than 55 (89: 55 = 1,618). 

The golden ratio and other dependencies found in the Fibonacci sequence can be applied in forecasting the foreign exchange market.

Too much calculating, isn’t it? 

Before you start playing around with any Fibonacci calculator, you need to know the important ratios:

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

Fibonacci retracement levels can help you determine how deep the correction can reach after changing direction. Determining all six levels of the indicator makes it possible to identify potential levels of support and resistance.

Fibonacci retracements and extensions are not predictors of the future, they are levels that help you establish some probabilities. However, there are so many traders who are placing their orders based on these levels that these levels can become a self-fulfilling prophecy.

If you want to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.

Swing highs and swing lows are points of a trend reversal.

A candlestick with at least two lower highs on both the left and right of itself is a Swing High.

A candlestick with at least two higher lows on both the left and right of itself is a Swing Low.

It is normal if you are confused after taking in all this information about Fibonacci levels, that’s why we’ll explain retracements, extensions furthermore in our next lesson.

Previous Article

What have we learned about Japanese Candlesticks?

Next Article

How to Use Fibonacci Retracements?

NOTE: It should NOT be assumed that the materials presented in Nuubie (the methods, the articles, the techniques, or indicators) will be profitable, or that they will not result in losses. Any reliance you place on such material is therefore strictly at your own risk.
Risk Warning: Trading in CFD’s on Leverage involves substantial risk of loss to your capital, they are complex products and are not for everyone. Between 74-89% of retail investors lose money when trading CFD’s. Trade with caution.