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Fibonacci Trading – What is Fibonacci Trading?

What is Fibonacci?

Developed by an Italian mathematician, commonly referred to as “Fibonacci” in the 13th century. His real name was Leonardo Fibonacci also known as Leonardo Pisano. •In the 19th century the term Fibonacci sequence was coined by the French mathematician Edouard Lucas.

In the 19th century the term Fibonacci sequence was coined by the French mathematician Edouard Lucas. The sequence of numbers, starting with zero and one, is created by adding the previous two numbers. For example, the early part of the sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377, and so on. Scientists began to discover Fib sequences in nature – Spirals of Sunflower Heads, Pine Cones, spiral in snail shells, and arrangement of leaf buds on a stem. Etc….. The Fibonacci sequence is significant because of the so-called golden ratio of 1.618, or its inverse 0.618. In the Fibonacci sequence, any given number is approximately 1.618 times the preceding number.

Fibonacci numbers are used to create technical indicators using a mathematical sequence.

  • Common Fibonacci numbers in financial markets are 0.236, 0.382, 0.618, 1.618, 2.618, 4.236. These ratios or percentages can be found by dividing certain numbers in the sequence by other numbers.

Remember those common Fib numbers? 0.236, 0.382, 0.618, 1.618, 2.618, 4.236.

All of the ratios are connected but HOW?

1.0 – .618 = .382

1.0 divided by 2 = .50

Square Root of .618 = .786

1.618 is the expansion of .618

Square Root of 1.618 = 1.272

.618 – .382 = .236

Fun Fact = The height of Pyramid of Giza from the base the top of the pyramid is 1.272

The Golden Ratio – Calculating Fibonacci

Each number in the sequence can be added to the previous number to produce the following number in the sequence. Dividing any number in the sequence by the following number yields 1.6180 – known as the Golden Ratio 

Dividing any number by its predecessor yields 0.6180.

Dividing any number in the sequence by a number two positions in advance yields 0.3820, while dividing any number by a number three positions in advance yields 0.2360.

Luckily, we have many tools already in most trading platforms that will do these calculations for us!!

Types of Fibonacci Trading

  • i.Fibonacci Retracements – These are horizontal lines on a chart that indicate areas of support and resistance.
  • ii.Fibonacci Extensions – Indicate where a strong price wave may reach.
  • iii.Fibonacci Arcs -These are compass-like movements stemming from a high or low that represent areas of support and resistance.
  • iv.Fibonacci Fans – These are diagonal lines created using a high and a low that represent areas of support and resistance.
  • v.Fibonacci Time Zones – These are vertical lines into the future designed to predict when major price movements will occur.

Fibonacci Retracements

During a trend, Fibonacci retracements can be used to determine how deep a pullback could be. Impulse waves are the larger waves in the trending direction, while pullbacks are the smaller waves in between. Since they are smaller waves, they will be a percentage of the larger wave. Traders will watch the Fibonacci ratios between 23.6% and 78.6% during these times.

If the price stalls near one of the Fibonacci levels and then starts to move back in the trending direction, a trader may take a trade in the trending direction.

Fibonacci Extensions

Fibonacci extensions are a way to establish price targets or find projected areas of support or resistance when the price is moving into an area where other methods of finding support or resistance are not applicable or evident.

Example – ATH or All Time Highs

Price extensions are essentially retracements beyond 100%.

Generally, the ratios of 1.272 and 1.618 are used.

  • •Run the Run Low to High Swings for possible support
  • •Run the High to Low swings for possible resistance

Fibonacci Retracements vs Extensions

Extensions show where the price will go following a retracement, Fibonacci retracement levels indicate how deep a retracement could be. In other words, Fibonacci retracements measure the pullbacks within a trend, while Fibonacci extensions measure the impulse waves in the direction of the trend.

Impulse Wave Rules – The three rules are: wave two cannot retrace more than 100 percent of wave one; wave three can never be the shortest of waves one, three and five. These rules are unbreakable. If one of these rules is violated, then the structure is not an impulse wave and one would need to re-label the suspected impulse wave.

Carolyn Boroden (Fib Queen) – Go To Setup

  • •Setup + Trigger = Trade entry and then manage (No trigger = No trade)
  • •Identify your setup
    • •Price Cluster Setup
    • •Symmetry Setup
    • •Two-Step Setup
  • •If price test and RESPECTS the setup zone, for a trigger go to a lower timeframe chart for an entry as it will signal an entry closer to where your RISK is defined!
  • •Swing Trade Setup Time Frames
    • •Weekly, Daily, 120 or 30min trade setups can be used for swing trades
  • •Trigger time frames
    • •15-Minute for aggressive entry (will get stopped out more often)
    • •30-Minute for regular entry (wont get stopped out as much as the 15 min)
  • •Buy Trigger for a Swing Trade Entry
    • •8 ema crosses above the 34 ema AND a prior swing high is taken out
  • •Sell Trigger for a Swing Trade Entry
    • •8 ema crosses below the 34 ema AND a prior swing low is taken out

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