Fibonacci, one of the most used technical indicators
Fibonacci It’s a big topic and there are a lot of different studies with weird names, but we’re going to stick to two: the fibonacci retracement and the fibonacci extension. We will talk about them in depth.
Leonardo Fibonacci was a famous Italian mathematician who had a “spark” moment and discovered a simple series of numbers that created ratios that describe the natural proportion of things in the universe. The Fibonacci sequence is derived from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
This series of numbers is obtained from 1 followed by 2 and then you add 1+2 to get 3, the third number. So, adding 2+3 gives 5, the fourth number, and so on. After the first few numbers in the sequence, if you measure the ratio of any number, the next highest number is .618. For example, 34 divided by 55 equals 0.618.
levels of Recoil (Fibonacci Retracement) are 0.236, 0.382, 0.500, 0.618, 0.764
The levels of Extension of 0, 0.382, 0.618, 1.000, 1.382, 1.618
You really don’t need to know how to calculate all of this. The software has all the graphics that will do all the work for you. But it is always good to be familiar with the basic theory of these types of indicators.
Trade with Fibonacci
Traders use Fibonacci retracement levels as support and resistance levels.. Since many traders open buy or sell positions near these levels or place stops. Retracement support and resistance levels fibonacci it becomes a probable expectation.
The same way, Traders use Fibonacci Extension levels as profit-taking levels. Since traders enter long or short positions near these levels to take profits, this tool also comes as a likely expectation.
Most software programs include both retracement levels and the fibonacci extension. In order to apply Fibonacci levels to your charts, you will need to identify swing high points and swing low points.
To identify the swing high, we look for a candlestick that has two candlesticks to its right and left that do not reach the higher price of the candlestick we are looking at. To identify the swing low, we look for a candlestick that has two candlesticks to its right and left that do not reach the lower price of the candlestick we are looking at.
Sounds interesting to you, right? keep learning with DTP with the next articles in our Blog.