Fibonacci Trading Explained in a Conk Shell

by | Nov 27, 2022

After being in the markets for 20 years. I have finally decided to write almost everything I know about the famous Fibonacci trading technique, how to trade it and understand it fully.

I thought the best way to right this article is to ask and answer a number of questions. This way, you’ll know exactly how it started, how it works and how you can apply and use it with your trading…

You deserve the highest form of trading education and I am here to serve…

Save this article for future reference, print it and Enjoy! so…

What is Fibonacci?

  • The Fibonacci sequence is a set of numbers

  • That starts with 1 and carries on

  • You add the two last numbers together.

  • You’ll get special ratios with the Fibonacci sequence

  • These ratios you’ll find in almost everything and anything!

History
Who started this sequence?

Leonardo Pisano (Italian mathematician) whose nickname was Fibonacci was born in the middle ages (13th Century) 1170 – 1250 in Pisa.

In the 13th century lived a man named Leonardo Pisano – one of the greatest mathematicians of all time. 

Leonardo (also known as Fibonacci), learnt all about Arabic and Indian mathematics during his travels in North Africa and around the Mediterranean regions. 

Each time he travelled to a new place, he kept noticing a consistent pattern that repeated itself throughout nature. 

Example: Seashells, body proportions, plants, snails, galaxies and even DNA.

So what is the sequence?

It might look like a random string of numbers at first, but there is a very easy formula he used to create this sequence.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 and so on to infinity…

Basically, you start with 0 and 1, and with each new number in the sequence you’ll simply add the previous number to it.
 
0 + 1= 1
1 + 1 = 2
1 + 2 = 3
2 + 3 = 5
3 + 5 = 8
5 + 8 = 13
8 + 13 = 21
13 + 21 = 34
21 + 34 = 55

What is the Golden Ratio?

  • Known as = Golden section, golden mean, divine proportion, golden number

  • Symbol is the Greek letter Phi Φ

  • Special number that = 1.618

How do you get the Golden Ratio?

 

Step #1: Fibonacci numbers
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…

Step #2: Ratio
Sum of the first two numbers and divide it by the larger of the two numbers.

(1 + 1) / 1 = 2
(2 + 3) / 3 = 1.666666
(3 + 5) / 5 = 1.6
(5 + 8) / 8 = 1.625
(144 + 233) / 233 = 1.618025

Bigger you go the closer to the Golden Ratio 1.618

Where can you find the golden ratio?
Almost everywhere in the universe!

  • Spirals (shells, flowers, pinecones, galaxies)

  • Body proportions

  • DNA

  • Starfish

  • Fingerprints

  • Molecules

  • Trading charts

  • Buildings (Parthenon)

3 Fibonacci Ratios –

Ratio 1 – 0.6180 or 61.8%
Ratio 2 – 0.382 or 38.2%
Ratio 3 – 0.236 or 23.6%

Ratio 1: 61.8% or 0.618

You can divide any consecutive number in the Fibonacci series

0, 1, 1, 2, 3, 5, 8, 13, 21, 34,      55, 89,       144, 233…
13
21 = 0.6190
21
34 = 0.617

55
89 = 0.617
144
233 = 0.61802
The higher the number, the closer it gets to 0.618,

Ratio 2: 38.2% or 0.382

This number can be found if you divide a Fibonacci series number by the second number two positions to the right.

1,1,2,3,5,8,      13,21,34,   55,89,144,    233

13
34 = 0.3823

55
144 = 0.3819

Ratio 3: 23.6%
0, 1, 1, 2, 3, 5,      8, 13, 21, 34,     55,       89, 144, 233, 377

Divide a number by the number found three positions to the right.
8
34= 0.2352

34
144 = 0.23611
89
377 = 0.23607

What is the Fibonacci Retracement tool?

The Fibonacci Retracement is a popular tool used by technical analysts.

They use it to identify 7 key numbers and potential support (floor) and resistance (ceiling) levels when trading a specific financial market’s chart.

There are 7 main Fibonacci Retracement levels.

Key number #1: 0% Extreme low
Key number #2: 23.6%
Key number #3: 38.2%
Key number #4: 50%
Key number #5: 68.2%
Key number #6: 78.6%
Key number #7: 100% (extreme high)

NOTE: The 50% level is not part of the Fibonacci numbers but it’s still used psychologically for a support and resistance.

It is mainly plotted to show you where half the distance is between the swing high and swing low prices, to give you a better idea on which direction the market is moving in.

What does Fibonacci have to do with trading the markets?
Fibonacci reflect on human:

  • Opinions

  • Valuations

  • Behaviours

Traders use these Fibonacci points to make trading decisions and this causes self-fulfilling prophecies.

3 Reasons to use Fibonacci when trading
Reason #1:
They find solid support and resistance levels

They are excellent for finding solid resistance (ceiling levels) and support (floor levels) on any high liquid (volume) market.

Reason #2:
Great entry and exit levels

Once you have found a market you wish to trade, the Fibonacci levels are great to use in your trading strategy for finding entry, stop loss and even take profit levels.

Reason #3:
Provide warning signals for possible pull-backs

As soon as you’ve plotted your Fibonacci indicator on the chart, you’ll be able to spot possibilities on where a market can fall or pull back over time.

This is because once a price breaches a Fibonacci level, you’ll be able to see where the next pull back for the market’s price will be…

How do you plot the Fibonacci Retracement tool?
You take the two extremes (Extreme low 0 and extreme high 100).
Then it divides the vertical distance by the key Fibonacci ratios.

From drawing from the lows to the highs, will show you the pull-back levels that are expected for the price to move to…

What happens when I draw up the Fibonacci on a chart?
You’ll see that the price tends to gravitate towards these support and resistance levels where traders can base buy and sell positions.  

How to plot the Fibonacci in a rising and Falling market
I have two simple rules for knowing how to plot the high and low of a Fibonacci Retracement indicator in a rising or falling market…

Rule #1: Downtrend – from High to Low

When the market is in a downtrend, you’ll click on the HIGH price and drag the cursor down to the LOW price…

The SWING HIGH price will be at 100% and the SWING LOW price will be at 0%.

Rule #2: Uptrend – from Low to High
When the market is in an UPTREND, you’ll click on the LOW price and drag your cursor to the HIGH price…
The SWING HIGH price will be at 0% and the SWING LOW price will be at 100%…  

Calculate the Fibonacci Levels on the chart – DOWNTREND?

First you need to establish the Swing High and the Swing Low price.

DOWNTREND – (High to low)
Swing High 100% = 69,685
Swing Low 0% = 57,157
Here’s the calculation:

DOWNTREND – [(HIGH – LOW) X Fibonacci Percentage] + LOW

FIB LINE 1: 23.60% = [(69,685 – 57,157) X 0.2360] + 57,157
                                   = 60,113

FIB LINE 2: 38.20% = [(69,685 – 57,157) X 0.382] + 57,157
                                   = 61,943

FIB LINE 3: 50%      = [(69,685 – 57,157) X 0.50] + 57,157
                                  = 63,421

FIB LINE 4: 61.80% = [(69,685 – 57,157) X 0.6180] + 57,157
                                    = 64,900

FIB LINE 5: 76.40% = [(69,685 – 57,157) X 0.7860] + 57,157
                                 = 67,004
 
Calculate the Fibonacci Levels on the chart – UPTREND?

First you need to establish the Swing Low and the Swing High price.

Uptrend – (Low to High)

Swing Low 100% = 56,587
Swing High 0% = 69,770

Here’s the calculation:

UPTREND = [(LOW – HIGH) X Fibonacci Percentage] + HIGH

FIB LINE 1: 23.60% = [(56,587 – 69,770) X 0.2360] + 69,770
                                   = 66,659

FIB LINE 2: 38.20% = [(56,587 – 69,770) X 0.382] + 69,770
                                   = 61,943

FIB LINE 3: 50%      = [(56,587 – 69,770) X 0.50] + 69,770
                                  = 64,734

FIB LINE 4: 61.80% = [(56,587 – 69,770) X 0.6180] + 69,770
                                    = 61,622

FIB LINE 5: 76.40% = [(56,587 – 69,770) X 0.7860] + 69,770
                                 = 59,408

If you enjoyed this in depth and complete article on Fibonacci and how it works with trading I’d love to hear your thoughts by emailing me at timon@timonandmati.com

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Enjoy and remember…

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Timon Rossolimos

Founder, MATI Trader

 

 

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