Fibonacci is the sequence of numbers discovered by Leonardo Fibonacci, an Italian mathematician: Fibonacci numbers start from zero, and then 1 after that.
Now if you calculate the ratio of each number to the next one, you will have the Fibonacci Ratios that are the same numbers levels we use in our Forex or stock market technical analysis: The only thing you should know is how to use the Fibonacci levels to analyze the price chart and find the next price destination. Fibonacci trading means to know when and where market reverses or keeps on following the same direction.
The most important thing in Fibonacci trading is that the Fibonacci levels act as support and resistance levels. When the price goes up, they act as resistance levels and visa versa.
It is the same as when a Fibonacci level becomes broken as a support. It will act as a resistance then. Nobody knows why Fibonacci numbers have such a feature. I think you have already seen the below painting by Leonardo Da Vinci he is another Italian scientist and physician. If you draw Fibonacci levels on it like what I did , you will see how Fibonacci numbers, specially the 0.
Fibonacci trading is not complicated. By using the Fibonacci numbers on the charts, you can find more supports and resistances. It will be a big help to choose the right direction and avoid taking the wrong positions. They are also so helpful in setting the stop loss and target orders. To use the Fibonacci numbers on the charts, you have to find the top and the bottom of the previous trend. You have to wait for the trend to become matured. Please follow the red numbers on the below chart:. The price that started going down on 23 Nov , touched the This level worked as a support, and so the price went up as soon as it touched the level, but then went down to retest the As you know, usually when the price cannot break a support or resistance, it tries again and again and sometimes it can succeed to break out of the level.
So the price went up, but tried to test the It touched the On 31 Dec it went down to retest the On 2 Jan it failed and went up. Currently 17 Jan it is retesting the If not, it will go up, or sideways.
While going up, the price tested the From 26 Aug to 1 Oct , price went up and down between the During this period of time, the It made a consolidation around the It had a hard time in breaking the It tried for ten days from 5 to 16 Oct to break the On 31 Oct , it reached the The price went much lower after it failed to break above the On 9 Nov it broke below the As you know, consolidations including, triangles, wedges, pennants and channels are continuation patterns.
It means the price usually follows the same direction that it was following before the consolidation forms. Why do Fibonacci levels have such a strong impact on the markets. Why does the price become stopped sometimes for several days below or above the Fibonacci levels? Of course if you use the Fibonacci levels in the bigger time frames like weekly and monthly charts, you will see that sometimes the price becomes stopped by one of the Fibonacci levels for several weeks or months.
I mean whether you know the reason or not, you can use Fibonacci levels in your trades. Prices go up and down because of the behavior of traders: It depends on your trading system.
You can use Fibonacci levels in all time frames. As I already explained, Fibonacci levels act as support and resistance levels. So when the price is going up and you have already taken a long position you have bought , you should be careful when the price becomes close to one of the Fibonacci levels.
It is possible that it goes down and you lose the profit you have already made. So you have to move your stop loss to the open price of the first candlestick that is touching the Fibonacci level or a little higher. It depends on the length of the candlestick. You can take a new position then. It is the same as when the price is going down, but in this case Fibonacci levels act as support. If you get ready for all these possibilities, you will not be trapped.
You have to treat the Fibonacci levels as the real support and resistance levels. They really have no difference and sometimes the price reacts to them very strongly. Fibonacci numbers really work in forex trading because they reflect the psychology of the traders. Trading forex or stocks is all about knowing the psychology of the traders: When most traders sell, the price goes down and when they buy, the price goes up. How can we know when traders decide to buy or sell?
Fibonacci numbers are one of the tools that reflect what traders may have in their minds. They can not find the start and the stop points for plotting the Fibonacci levels. They choose the wrong points to plot the Fibonacci levels and this causes them to make mistakes. One of the best places to plot the Fibonacci levels, is the resistance and support of the ranging markets.
We can see the ranging or sideways markets on all different time frames. A range, long or short, will be broken finally because the market cannot stay in an indecision situation forever. A range can be broken down or up, and this is what we want to know to take our positions and follow the markets.
If you are a Fibonacci trader, all you need is finding a range on one of the time frames and then finding the high and low of the range. Let me show you some examples. Please follow the notes on the image below as you are reading these explanations.
The distance between high and low of this range was over pips. It was still tradable but obviously the market was not trending. Almost on January , we could not guess that we are at the beginning of ranging market, but when the price went down on Then, when the price went up and made a high at 2.
On a ranging market, chart patterns like triangle, wedge or even head and shoulders can form. If the price breaks above the range, an uptrend will form, and visa versa. On the below chart, the price tested the 1. So, this can be considered as a signal that the range would be broken down. However, we should always wait for a real breakout:.
Almost all of the signs higher lows tell us that the range should be broken down. We have to wait until the breakout occurs. When the support of the range is broken, we can go short and when the resistance is broken, we can go long. The signals indicated that the price would break below the range.
Therefore, I plotted the Fibonacci levels from the low of the range to the top. Also, all other These numbers are called the Fibonacci Extensions:. Please follow the below chart. We could go short at the close of this candlestick if we were not already short after the formation of the Our target would be the The stop loss has to be placed above the open of this candlestick.
When the price breakouts out of a range, the If the breakout is strong enough, the Among the Fibonacci retracement levels or the levels that are placed between zero and , the Before this lower high, we have a smaller lower high which is formed below the Do you see how exactly and precisely the Fibonacci levels work? As you see the below image when the price reached the It is time to emphasize on the importance of On the below chart, the price goes up and retests the Again when the price broke down theMore...