In financial trading in general and forex trading in particular, it can be said that the Fibonacci sequence is a powerful “assistant” used by many professional traders. But where does Fibonacci come from and how is it used? Let’s find out with Learn Forex Trading.
Concept of Fibonacci sequence
Surely in life, we have used the Fibonacci ratio a lot. However, maybe for some reason we don’t notice or don’t know. So, it’s better to learn it and find ways to use it.
In theory, there are two main types of Fibonacci: Fibonacci Retracement and Fibonacci Extension.
First, the origin of the Fibonacci sequence was invented by mathematician Leonard Fibonacci.
Leonardo Pisano (1170-1250), commonly known as Fibonacci, was an Italian mathematician. Invented the number series that bears his name. From left to right after the first 2 numbers, the value gradually increases in the series of numbers. Each subsequent number is determined by the sum of the previous 2 consecutive numbers. For example :
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, the next number is 610….
It’s so easy to understand, right?
Let’s improve it a bit:
In the Fibonacci sequence, if you take the ratio of any number to the next number immediately after it. The result will both be 0.618. For example: 34/55 = 0.618, 55/89 = 0.618…
Wow, it’s magical, right?
Let’s continue:
If you take the ratio alternately between numbers. Take any number and divide it by the next number after it. The result will be 0.382. For example, 34/89 = 0.382 or 55/144 = 0.382….
Wow, it continues to be amazing.
But the most special and wonderful thing is 1-0.618 = 0.382.
These ratios are called the golden ratio of the Fibonacci sequence.
What are Fibonacci levels?
The Fibonacci number sequence has 2 levels, a retracement level, and an extension level:
With Fibonacci retracement levels will be: 0.236, 0.382, 0.500, 0.618, 0.764.
The extended Fibonacci levels will be 0, 0.382, 0.618, 1.000, 1.382, 1.618.
In some of your trading software. It will automatically calculate these levels of the Fibonacci sequence. So you don’t need to waste time calculating anything. But if you know how to calculate, it is indeed a big advantage.
See more: Grasp world oil prices to “master” transactions
Popular types of Fibonacci today
Fibonacci types correspond to certain methods, let’s take a look at these types:
Fibonacci arcs (FA)
+ First, Fibonacci arcs (FA) are used to predict support levels. And resistance when the price graph approaches the curve. This is a popular technique that monitors both the FA and FF (Fibonacci Fan) lines. And predict the support/resistance level at the intersection between the price chart and the FA/FF line.
Remember that at what point the price graph intersects the FA line depends on the size of the graph. In other words, the FA line is drawn on the graph so it correlates. With the balanced size of the graph on the MT4 software screen. Refer to the image below:
Fibonacci Fan (FF)
+ Second, the Fibonacci Fan (FF) is drawn by connecting the two highest price points. And the lowest of the analysis phase. A vertical line will then be drawn through the highest price point. Next, 3 diagonal lines will be drawn from the lowest price point. Cut the vertical line at 3 levels 38.2%, 50.0%, and 61.8%.
You can see when the price chart meets the highest FF line (point A). The price chart cannot cross the FF line for many days. When the price just crossed the FF line, it quickly fell to the bottom point on the third FF line (points B and C) before finding support. Also note that when the price moves through the bottom point (point C), it moves to the highest point (point D) on the 1st FF line and is also the resistance point, then falls to the midpoint on the FF line. second (point E) before changing direction. Refer to the image below:
Fibonacci Retracements (FR)
+ Third, Fibonacci Retracements (FR) are first determined by drawing a straight line connecting the two highest and lowest price points of the price chart during the analysis phase. A series of 9 horizontal lines are then drawn at the Fibonacci levels 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and 423.6% corresponding to the height from the point highest to lowest price (some lines may not be drawn outside the chart’s analysis scale).
After each major period of price movement (which can be up or down), the price usually tends to reverse the trend (fully or partially). When the price reverses, new support or resistance levels are often located on or near the FR line (see chart – support and resistance levels appear at the 23.6% and 38.2% Fibonacci lines).
Fibonacci Retracements in MT4 software.
Fibonacci Time Zones
+ Finally, Fibonacci Time Zones consist of a series of vertical lines. Arranged in the order of Fibonacci sequence 1, 2, 3, 5, 8, 13, 21, 34, … Like other lines, price changes often have support/resistance levels located near or on these vertical lines.
Fibonacci Time Zones with vertical lines on MT4.
See more: Instructions for registering an XTB account
Instructions for using Fibonacci
Of the 4 types of Fibonacci, we will usually only use one or two types, even professional traders. Traders use Fibonacci Retracements (retracements) levels as effective resistance and support levels. They use these levels to enter buy/sell orders or determine stop-loss levels
In MT4 or other software, a Fibonacci drawing tool is often available. To draw Fibonacci on a chart, you need to determine the lowest and highest points in a market trend.
A specific example of using Fibonacci in a specific application case of a trading order:
The GBPUSD currency pair is in an uptrend, with clear tops/bottoms formed, then we use Fibonacci Retracements, connecting the most recent top and bottom formed, then the Fibonacci number sequence has been The calculation will appear as levels such as 38.2, 50.0, 61.8,…
And then the price returns to the uptrend, reaching the 50% zone of this Fibonacci sequence Retracements, we can enter a Buy order following the trend, and clearly, the uptrend is very strong after that.
In addition, you can also learn more about Bollinger bands and Elliott wave for a more comprehensive overview. Easier and more convenient transactions.
Epilogue
Nothing is 100%, and no matter how magical the Fibonacci sequence is, it cannot guarantee 100% success for you if you do not have other knowledge, as well as follow important news of the economic calendar. You can see it on Investing.com, forexfactory,… Hope Learn Forex Trading article is useful to you.
