What is Fibonacci?
Leonardo Fibonacci was a mathematician born in Italy during the 12th century. He is known to have discovered what they now call, the “Fibonacci numbers,” which are a structure of numbers where each successive number is the sum of the two prior numbers. E.g. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. These numbers possess a number of interrelationships, such as the fact that any given number is approximately 1.618 times the preceding number.
Using the Fibonacci numbers is very popular amongst traders as it is said that if applied correctly you could predict the price movements 70% of the time. In saying that a trader shouldn’t use Fibonacci numbers as correct levels of support and resistance but rather as a psychological level while reading the charts.
Use your MT4 trading platform or whichever platform you are using. Draw the Fibonacci lines from the higher high to the lower low of a price swing. Most charting software packages come with an inbuilt Fibonacci retracement grid that can be used by traders. Choose the Fibonacci grid option present in the charting software. Then click on the higher high of a price swing. This would be the zero percent retracement level. Then drag the Fibonacci grid to the low point of the price swing and click at that point. This low point would be the 100% retracement level. The remaining levels (i.e; 11%, 23,6 38.2%, 50%, 61.8%,77% and 89%) would be automatically calculated and displayed on the Fibonacci grid by the charting software. These levels are the possible reversal levels during an uptrend. In case of downtrend, the Fibonacci levels are calculated by choosing the high point as the 100% retracement level and low point as the zero percent retracement level.
Using the Fibonacci Levels can help predict the price action of a particular financial instrument 70% of the time. These levels are a great psychological help for understanding support and resistance levels. Use the Fibonacci levels can also be very useful for risk management to a trader by helping them with entry and take profit levels
How to Apply the Price Fibonacci Levels
Adjust your Fibonacci levels in your charting software to accommodate the following levels:
•11 – Used for target.
•38.2 – Potential trend reversal
•50 – Potential trend reversal.
•61.8 – Potential trend reversal.
•77 – Potential trend reversal.
•89 – Potential trend reversal or used as a target.
•100 – Price target
•161.8 – Price target.
•261.8 – Price target.
The price Fib is used to assist identifying the retracement. Picture an elastic band, the further you pull it back, the further it will shoot in the future.
Apply the price Fib from the High to the Low or the Low to High depending on which way the trend is going. The retracement should take place at the 38.2, 50, 61.8, 77 or 89 levels. Make sure that the 100 level of the fib is on high and the 0 level of the fib is on low.
To identify your take profit level, move the price Fib and place the 100% Fib level on the top of the retracement. The first price target will be 38.2% and the final price target will be 11%.