Fibonacci sequence explains the proportions of elements in nature. It starts with 0 and 1, the rest of its elements being obtained by summing up the two precedents.
Excepting the first few, the ratio between the consecutive elements is 1.618 – called the golden ratio.
In trading we use:
! Fibonacci tools work only if there is a trend.
Identifying Fibonacci Retracement levels:
1. Identify the most recent and relevant:
Swing Highs - Candles that have on both sides and at least two candles with lower Highs.
Swing Lows - Candles that have at least two candles with higher Low.
2. Link:
In Ascending trend: Swing Low with Swing High, in this specific order.
In descending trend, Swing High with Swing Low, this specific order.
Fibonacci Retracement levels should not be used issolated.
They can be used in conjunction with Support and Resistance.
If a Retracement serves as Support, the immediate upper Retracement levels can serve as Resistance. If a Retracement already serves as Resistance, the immediately inferior levels can serve as Support.
The crossover between a Retracement level and a Trend Line may be a potential entry point. Attention to the candles formed immediately near a Retracement level – they can confirm if the Retracement - S / R will resist.
Fibonacci Extension levels are plotted in the same steps as Retracement Levels + Drawing the Second Line linked to the highest/lowest point of the last corrective move.
Fibonacci tools for setting SL
Method 1 - recommended for one day trades:
For Buy orders - Set SL immediately under Support-Retracement;
For Sell orders - Set SL immediately over Resistance-Retracement.
Method 2 - recommended for longer term trades:
For Buy orders - Set SL immediately under Swing Low;
For Sell orders: Set SL immediately over Swing High.