Who is Fibonacci (1170 – 1250)?
His real name is Leonardo Pisano, who is a mathematician living around the 12th century in Pisa (Italy). He invented the Fibonacci sequence (1,1,2,3,5,8,13,21,34, etc.) based on observations of the Gizeh Pyramid in Egypt. The Fibonacci sequence has a ratio of 2 adjacent numbers approximately 1,618 (or the inverse is 0.618). This ratio is called the Golden ratio (PHI). When used in technical analysis, the Golden Ratio is usually converted into 3 ratio ratios: 38.2%, 50%, and 61.8%. However, other multiples can also be used, such as 23.6%, 161.8%, 423%, etc.
Fibonacci
Fibonacci sequence is often applied in technical analysis in many forms: retrieval, arc, fan, extension and time zone. It is used in all markets and serves various purposes for traders, and of course, it is not just about finding the right times to invest and stopping losses.
Draw Fibonacci Retracement
Honestly, we do not have any rigid rules about how to use the different Fibonacci tools. Remember that Fibonacci levels are based on percentages, meaning you have to be flexible when drawing them.
The first thing you need to do before using the Fibonacci retracement tool is to determine a price range between two points on the chart to measure, which are called point A and point B. Both of these points must be top or bottom in the chart, with prices fluctuating in a definite trend between them, as in the examples below:
Next, finding the Fibonacci retracement tool in your chart base, click to point A and drag the tool to point B.
In TradingView, the Fibonacci retracement tool is found in the menu bar to the right of the chart. Click the third button from the top (the pitchfork button) and you will be able to see it among many other drawing tools.
Once you have found the top and bottom of the market, the next step is to determine the retracement point, which we will call a point C. This is the end of the reversal/retracement, and the price returns to the previous trend (like between points A and B).
Use Fibonacci as Support and Resistance levels
One of the most important things here is that price movement does not necessarily reverse at the Fibonacci level. However, the levels are often interpreted as support and resistance levels, which the prices can reverse. This can be clearly seen in the chart below that we highlight some points, in which the Fibonacci levels act as support and resistance levels when the prices return to their original trend.
From there, we see that most of the Fibonacci Retracement are used as an indicator to start investing. For example, a trader might use Fibonacci levels as a re-entry level in the drawdown when we have left point C and the price is returning to its original direction.
Use Fibonacci as Profit Targets
Another important use of Fibonacci levels is to set as profit targets when surfing. Then we spend more attention on Fibonacci extensions than the Fibonacci retracement.
The rules here are quite different for each trader, but everyone agreed that a 38.2 retracement usually ends at the Fibonacci extension 138 from the beginning. Similarly, the Fibonacci retracement 50, 61.8, or 78.6 will usually go to extension 161.
The basic idea behind the use of Fibonacci tools is the notion that a movement that goes against the trend will return to the overall trend in the market. In this context, Fibonacci numbers can be a useful tool to combine the initial trend with the keep-going trend. For example, we are combining main support and resistance levels or other technical indicators. In this way, we will have a more accurate approach to using Fibonacci levels, while ensuring where the levels are and we can predict what the prices will be like from there.
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