Fibonacci.
Is that a load of old hocus-pocus nonsense, or does it still hold relevance in today's market? Great question, is that a load of old hocus-pocus nonsense? Well, before we get into the nuts and bolts of that let me define exactly what Fibonacci is.
As we've seen from previous videos, markets are either in a state of trend, that's moving up or down in a particular direction or they're consolidating or they're said to be in a range that's when no trend is in play.
Now, very rarely when markets are in a trend do they continue in a particular direction without a pullback or retracement along the way.
Now, Fibonacci is a commonly used trading tool that technical traders use to help them predict these retracement levels or turning points in a trend.
But they also use the Fibonacci levels to help predict future target levels where prices may stall, giving us an opportunity to take profits, or indeed look for counter trend opportunities.
That's basically when the trend may be reversing.
Now, Leonardi Fibonacci was a 13th century mathematician and he developed a simple formula that threw up a number sequence which showed to have relevance in multiple events in nature and everyday life: from the stars and the sky; to the relationships of our limbs; to the patterns on a shell; and indeed, the number of petals on a rose.
Come join me on the whiteboard now, and I'll show you exactly where these numbers come from, how they're drawn in the chart and how to use them in our trading.
Now, the Fibonacci number sequence is quite simple to calculate.
You simply add two numbers together to get the next number.
Let me explain very simply how that works.
So you got 0 and 1 to start off with.
Add those together and clearly you get 1.
Add 1 plus 1, you'll get 2.
2 plus 1, 3.
3 plus 2, 5.
5 plus 3, 8, and so on.
.
.
Now, you most probably can't see it at the moment, but within this fibonacci number sequence, there are patterns and these patterns repeat themselves no matter how far you go down in the number sequence.
For example, if you take a number in the sequence, and divide it by the next number it's going to give you the number that repeats itself, time and time again.
So 21 divided by 34 is going to give you 0.
618 .
That will be saying if you divide 89 by 144, 233/377.
Now, if you take a number in the sequence and divide it by the next two numbers; so for example 55 divided by 144 That's going to give you 0.
382 and, that's going to be same throughout the sequence.
When you take a number and divide it by the third number, in the sequence, that's going to give you a new number.
That's going to be 2 36, 0.
326.
Now, us, as traders, we'd like to use these numbers as potential retracements.
Why, because it happens in human nature, so why can't it happen in the markets? Makes logical sense doesn't it? Well, I'll let you be the judge of that.
What we do, we multiply these up to give us a percentage retracement, so we've got 61.
8% We've got 38.
02% And we've got 23.
6%.
Of course you can do this This pattern calculation throughout the sequence and get up other numbers as well.
But these are the most common numbers that we use.
So I'm going to show you now on a chart, exactly why these are relevant on a particular price chart.
So as you can see here, We are clearly in an uptrend from a low down here.
Price is moving up making higher, highs to the high up here.
Now, as we know, trends very rarely move in a direction without pullback through retracements, along the way.
And we're going to use our Fibonacci numbers for potential turning points or pauses in that pullback, in order to get back in on the trade.
So basically plot our Fibonacci levels by taking a price line from the from the low, to the high and plotting a percentage retracement, so from down here to up here, a 23 percent retracement.
23.
6% retracement will be somewhere like that, and a 38.
2% retracement could be down like here.
And of course the 61.
8% wll be down somewhere or like that.
So potentially this market if it does reverse could find support at the 23.
6%, so Fibonacci traders may potentially be buying at this level as potential support.
Indeed, it may break the 23.
6 and carry on going down to the 38.
2 again.
You might find some some buyers coming in here, expecting this 38.
2 to be a level of significance; a level of support, and indeed, the same back at 61.
8.
Some traders will say a break of 61.
8 means it's going to continue back to the beginning of that tren.
Now, that's one way of using Fibonacci levels.
You'll also be using Fibonacci levels for extension levels, for take profit targets, and key reversal levels, in trend for counter trend trading, and so forth.
You will note here I have not included the 50% level now a 50% level is often used by Fibonacci traders in retracement analysis; however, is not actually a Fibonacci level, in terms of the patent calculation that I showed you a moment ago, or perhaps it is.
If you divide one by two which are the first two numbers in the sequence, you get 50%? Saying that number doesn't repeat itself throughout the sequence or like the other numbers and numbers do as well.
Now, let me get over of the charts in a moment.
I'm going to show you this on a real price chart.
It might become a little bit clearer then.
So let's go over to the price chart now.
Okay, so here we are on a price chart.
Now, you can see the market is clearly broken out into trend.
We are looking to enter this trend potentially on a pullback, so we use our Fibonacci levels for a potential pullback stalling point.
So most broker platforms have a Fibonacci drawing tool.
This is MT4 for metatrader4 and the Metatrader for Fibonacci tool is this.
.
.
Here in the top left.
We take our tool typically from a swing low up to a swing high, and that automatically plots potential turning points.
Should this market turn back down and start to have a pullback.
Now, we'll progress through the chart and see exactly how well these levels have been respective.
So as we go the market now, starts to turn back and hits on to the 23.
6% retracement of that bigger move and indeed, is respective.
Finally, it has a bounce and then finally breaks through back down to the 38.
2% and again is respective.
While back up to the 23.
6 now down to the 38.
2 again.
You see some lot of *inaudible* there And then breaks through down and test the 50% zone for a big bounce and on it goes.
Now clearly, I've picked a chart here that it works.
It'd be futile to pick a chart where it doesn't work for this short presentation.
But you get the idea, these Fibonacci retracement levels can be very very powerful levels of a pause in a pullback.
So, to answer the headline questio- is Fibonacci just a load of old hocus-pocus, self-fulfilling nonsense, or does it indeed hold relevance in today's markets? Well, I'll let you be the judge of that.
But certainly it does seem to have an amazing respect on the longer time period such as the daily, weekly, and the monthly time period .
Just check it out see for yourself.
I certainly like to use some Fibonacci in my daily strategies I particularly like the 50% and the 161 extension levels I discuss these in my daily strategies when I trade live in front of our members around the clock here at Forexsignals.
com Check it out.
If you haven't already done, so.
Either way, if you are using Fibonacci, I suggest you use it in conjunction with other price action and not as a standalone indicator.
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