Leonardo Fibonacci was the most important European mathematician of the Middle Ages.

One of the most important scientific instruments that bears its name is the sequence of numbers that explains the proportions of elements in nature.

The sequence begins with the 0 and 1, the following components being obtained in progression by summing up its precedents:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597 and so on.

Transposed into geometry, this sequence defines a spiral found everywhere in nature, whether we are talking about a snail's shell, the arrangement of the leaves and petals of a flower or sunflower seeds.

 

The ratio between two consecutive numbers, excepting the first few ones, is equal to 1,618, and is called the Golden Ratio.


In trading, the two rations of particular importance are:

• Fibonacci Retracement Levels: 0.236, 0.382, 0.500, 0.618, 0.764.
• Fibonacci Extension Levels: 0, 0.382, 0.618, 1.000, 1.382, 1.618.

Most trading platforms automatically computes these reports.

Fibonacci Retracement levels are used as potential Support and Resistance areas and Fibonacci Extension levels are used to identify exit points (to set a Take Profit).

Using these levels involves identifying Swing Highs and Swing Lows.

A Swing High is a candle that has before and after it at least two candles with lower Highs.

A Swing Low is a candle that has before and after it at least two candles with higher Lows.

 

We’ll return to them in more detail.

 

Using Fibonacci Retracement levels to enter a trade

Fibonacci instruments must be used only if the price evolves into a trend.
The basic idea is the following:

• During ascending trend, we can place a Buy order after price rejection from a Fibonacci Retracement Level that can be considered a support.
• During descending trend, we can place a Sell order after the price rejection from a Fibonacci Retracement Level that can be considered a resistance.

The first step in this direction is to identify the most recent and relevant Swing Highs and Swing Lows.


For descending trend: The latest Swing High will be linked to the latest Swing Low.

 

For ascending trend: The latest Swing Low will be linked to the latest Swing High.

 

Summing up, the line joining the two points will end to the last extreme point of interest (a Swing High for ascending trend, a Swing Low for descending trend).

Using Fibonacci Retracement levels in conjunction with Support and Resistance

Like the other technical tools, Fibonacci Retracement levels can’t be isolated but used in correlation with other instruments.
One of the most effective ways to use Fibonacci Retracement levels is to identify potential of support and resistance areas and to analyse whether they overlap with Fibonacci Retracement levels.

If a Fibonacci level already serves as a support / resistance level, then using it correlated with other Fibonacci Retracement levels - levels of interest for many other traders - will increase the chances for a rejection of the price from these levels/areas.

 

 

Why is there a greater probability of rejection in these areas?

Firstly, support / resistance levels themselves are areas of interest for entries.

Secondly, Fibonacci tools are widely used, therefore it is very likely that many traders will open their orders considering the same Fibonacci levels as support / resistance.

In conclusion, Fibonacci tools increase our chances to make a correct prediction on price evolution.

Using Fibonacci Retracement levels in conjunction with Trend Lines

Fibonacci Retracement levels can be successfully correlated with the Trend Lines as well.

Fibonacci Retracement is used to determine entry levels, levels that may correspond to a crossover between a Fibonacci Retracement level and a trend line.

Certainly, although they are of interest to many traders, these crossover points depend on how each trader draws the trendline and identifies Swing Highs and Swing Lows, which are very subjective operations.

We can’t count that the level found on our chart is the same as the ones on other traders’ charts we can count on the already existing trend!

 

The Fibonacci Retracement levels in conjunction with Japanese Candles

Japanese candles formed very close to Fibonacci Retracement level can prove whether they will resist as support / resistance.

Of particular interest are the candles that signal an " exhaustion" of the trend, such as a Doji.

 

 

Using Fibonacci Extension Levels for TP setting

Fibonacci Extension levels can be identified in 3 steps:

• Selecting the most recent and relevant Swing Highs
• Link it to the most recent and relevant Swing Low and select it
• Move to any Fibonacci Retracement levels and click on it

After this operation Fibonacci Extension levels will appear on your chart along with their associated price levels. Each of these levels is a potential support / resistance area, so any of these could be used as potential exit areas.

 

 

Note that:

• We can’t know for certain which of the Fibonacci Extension levels will serve as support / resistance
• A second problem is identifying Swing Lows and Swing Highs from which to plot Fibonacci Extension levels - a first method involves selecting the most recent and relevant extreme point, and a second method involves selecting these points on the range of the last 30 bars.

None of these ways can’t be qualified as better than the other, but with time and experience you will come to make more and more suitable choices in this regard.

Using Fibonacci Instruments to set a Stop - Loss

Stop-Loss orders are an imperative component of any profitable trading strategy. Never let your orders drift.


There are some simple ways to use Fibonacci tools to set a Stop-Loss in order to keep your risk under a certain level.

Method 1: Set SL immediately above / below Fibonacci Retracement



Setting a SL immediately below / over the next Fibonacci Retracement level - assumes that this level will hold as a support/resistance. But, as we have mentioned, plotting these levels is not an exact science.
The price could (which is often the case) to move in the unfavourable direction, reaching the SL and being automatically closed, then following its initial course. Precisely in the light of this probability we recommend the first method especially for short-term trades (up to one day).

Method 2: Set SL immediately above / below Swig High / Swing Low



This is an appropriate way for long-term trades, giving it time to remain active as the price evolves.


Choosing the most appropriate way to set a SL depends on your own trading style (on short, medium, long timeframes) and how you decode the information provided by Fibonacci vs. Support / Resistance / Trend Lines / Japanese Candles.

In any case, setting SL is not an exact operation. We recommend an open attitude to any possible scenario - gain or loss.