Fibonacci is an indicator which assists traders to find entry points and to identify possible take profit levels. Fibonacci levels identify key support and resistance levels.
The biggest difference between Fibonacci and other indicators is that Fibonacci is a law of nature. An Italian mathematician Leonardo Pisano Bigollo discovered the ‘golden ratio’ to be 0.618.
How To Use Fibonacci?
The most important thing to know about using Fibonacci is that it works best in a trending market. Fibonacci retracements help traders in determining entry points.
Traders enter long on a retracement Fibonacci support level when the market is in an uptrend and enter short on a Fibonacci resistance level.
Finding Fibonacci Levels
To get the retracement levels on Fibonacci, you need to find the most recent and significant swing highs and swing lows.
Here’s how to use the Fibonacci tool.
When the market is in a downtrend, click on the swing high, then drag the cursor to the most recent swing low. In an uptrend, you will click on the swing low and drag the cursor to the swing high.
Once you’ve done that, Fibonacci will show you retracement levels at 23.6%, 38.2%, 50% and 61.8%.
When the price pulls back to the level between the 50% and the 61.8%, that is a good zone to buy or sell, depending on whether the market is in an uptrend or downtrend.
Some traders use 38.2% retracement to enter trades. The market has shown that it retraces to the 50% and 61.8% in most cases. The market will retrace to 38.2% only in very strong trends, in most cases.
Although Fibonacci is a powerful tool to determine entry points, you should use it in conjuction with other tools e.g. support and resistance. If the 50% or 61.8% retracements line up with strong support or resistance,it is another confirmation that the market will retrace to that level before continuing in the direction of the trend.
Another great confirmation could include a candlestick pattern such as a hammer or shooting star.
If the market retraces beyond the 61.8% level, it could be an indication that the trend is not as strong any more.
Fibonacci Extensions
Fibonacci retracements help us to identify good entry points, but Fibonacci extensions help us to set take profit targets.
Extensions help traders to estimate how far the price will go after it has retraced. Fibonacci retracements levels use 23.6%, 38.2%, 50% and 61.8%, whereas Fibonacci extensions are 123.6%, 138.2%, 150% and 161.8%.
To plot the extensions on your Fibonacci, go to Fibonacci properties, Fibo levels and enter -0.236, -0.382, -0.50 and -0.618.
Goran Radanovic
