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Fibonacci extensions and retracements are technical analysis tools used by traders in financial markets to identify potential levels of support and resistance. These levels are derived from the Fibonacci sequence, a mathematical pattern discovered by an Italian mathematician named Leonardo Fibonacci.
OK, but who actually was this guy and what did he do? Let’s quickly found out!
TO USE FIBONACCIS, FIND OUT ABOUT THE MAN BEHIND THEM FIRST.
Fibonacci: The Man, The Myth, The Mathematician.
Background: Fibonacci, also known as Leonardo of Pisa or Leonardo Pisano Bigollo, was a renowned Italian mathematician born in 1170. He is famous for popularizing the Hindu-Arabic numeral system in Europe.
Early Life: Not much is known about Fibonacci’s personal life. He was born in Pisa, Italy and his father, Guglielmo Bonacci, was a wealthy merchant. Leonardo of Pisa received his education in North Africa where he traveled with his father who was stationed there as a customs official.
Career: Fibonacci is best known for his book “Liber Abaci” (Book of Calculation) which introduced the Hindu-Arabic numeral system to Europe. Prior to this, Roman numerals were used for mathematical calculations which were much more complicated and limited in their application. Fibonacci’s book also popularized the use of zero as a number. But his main contribution is the Fibonacci sequence.
What Is The Fibonacci Sequence?
Fibonacci sequence, also known as the Golden Ratio, which is a series of numbers where each number is the sum of the two preceding ones. It starts with 0 and 1, and continues on infinitely as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, …
This sequence has been found to occur naturally in many aspects of life such as plant growth patterns and animal breeding. In financial markets, it is used to identify potential levels of support and resistance as it is believed that these numbers have a significant impact on market movements.
When it comes to using the Fibonacci sequence in trading the financial markets, almost every trading and charting platform today has what we call a Fibonacci Tool in its toolbox. What this tool allows you to do, is to draw Fibonacci retracements and extensions in your charts, that consequently give you sort of your possible, alternative levels of support and resistance. Let us investigate these further:
A. FIBONACCI RETRACEMENTS
Fibonacci retracements are used to determine potential levels where price may experience a pullback or correction before continuing in the direction of the overall trend. These retracement levels are drawn by connecting the high and low points of a given price trend and then dividing the vertical distance by key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8% and 78.6%). These levels are considered important support or resistance levels as they represent potential areas where buyers or sellers may enter the market.
B. FIBONACCI EXTENSIONS
Fibonacci extensions are used to determine potential levels where price may experience a continuation of the trend after a retracement. These extension levels are drawn by connecting the low and high points of a given price trend and then using Fibonacci ratios (127.2%, 161.8%, 261.8% and 423.6%) to project potential areas of support or resistance in the future.
These levels are used to identify potential price targets and can also be used for setting profit targets or stop losses.
How To Use The Fibonacci Levels In Trading.
When using Fibonacci retracements, traders will often look for confluence with other technical indicators such as trend lines, moving averages, or support and resistance levels. If multiple factors line up at a certain Fibonacci level, it is considered a stronger level of support or resistance. In addition, traders may also use Fibonacci retracements in conjunction with other technical analysis tools to identify potential entry and exit points for trades.
Similarly, when using Fibonacci extensions, traders will often look for confluence with other price levels or technical indicators to determine potential areas of future support or resistance. They may also use these extension levels to set profit targets or to identify potential reversal points in the market.
Overall, Fibonacci levels can be a useful tool for traders when used in conjunction with other technical analysis techniques. They can help identify key areas of support and resistance, potential price targets, and entry/exit points.
FINALLY: HOW TO MAKE MONEY ON FIBONACCIS?
It is important to note that trading on Fibonacci levels alone is NOT advised (we certainly do not advocate to do it), and using the tool should NOT be solely relied upon — rather, Fibonaccis should always be used in combination with other technical analysis tools and risk management strategies.
So, it is important for traders to continue learning and practicing other trading strategies in order to effectively use them along with Fibonacci levels, if they want to be successful in trading the financial markets. With experience and knowledge, traders can become more confident in using Fibonacci retracements and extensions as part of their overall Trading Plan.
Also, you should know that we here at Success Illustrated do not use Fibonacci levels in any of our Trading Systems. The Fib tool simply does not have what it takes to make the cut! There are, at least in our opinion, better, more reliable, and most importantly, more effective tools and indicators that we prioritize – since that is what extensive backtesting of our systems showed us. Explaining the prevailing attitude towards Fibonaccis here at SI can be found in the following video:
To really learn how to trade the financial markets with consistent success, week in and week out, to dive deep into what are the exact technical and fundamental tools we use – and what are the ones we don’t use – how and in which order we actually combine them in our renowned Game Plan, the CONDI Trading System, consider taking our Masterclass. Discover more by clicking on the link below:
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