Fibonacci Levels Reveal Patterns For Trades
One of the enlightening moments of becoming a trader is the realization of how the market unfolds into a series of self-repeating, symmetrical patterns.
(Check out the free video, above, for insight into trading this changing market.)
Using Fibonacci levels to reveal trades
“Fibonacci” is a step back in history and science and the term comes from the Italian mathematician Leonardo Pisano. Pisano’s nickname was “Fibonacci” and his most famous and significant contribution to mathematics was the discovery of the Fibonacci sequence.
To define Fibonacci in trading, geek out with us for a moment.
Numbers ratio for Fibonacci trading
In its most basic form, the Fibonacci sequence starts with 0 and 1, then each number is the sum of the previous numbers.
For example, the sequence goes as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, and so on, continuing indefinitely.
Each number in the sequence is about 1.618 times greater than the number that came before and, the larger the number, the more precise it is to the 1.618 multiple. This number – 1.618 – is referred to as the Golden Ratio -also known as Phi -and is considered the most irrational number in mathematics.
Interestingly, the Golden Ratio appears frequently in nature, such as the wings of a butterfly, shell of a mollusk, the structures of many flowers, and even the tail of a chameleon.
How do traders use Fibonacci retracement levels?
For traders, Fibonacci retracement levels are important trading signals that offer a level of “certainty” in an uncertain market. These indicators were derived, not from the Fibonacci sequence, but from the relationship between the numbers in the sequence themselves.
Fibonacci retracement levels are based on percentages. These price levels of support and resistance are points on a trading chart where a potential reversal in direction could happen. These Fibonacci levels can be used to establish entry and exit points for potential trades.
During this market volatility, Simpler’s traders use Fibonacci analysis to find this resistance in indexes and stocks that may reveal trade possibilities.
As an example, a Fibonacci analysis of the S&P 500 showed a nice retracement with a double top and a well-formed extension. The index was respecting this form of technical analysis which gave an interesting way of mapping out the high for the session that would carry into the next day. This is an important swing in the chart that gives more insight into the trendline.
The ratios of the swing high and swing low with resulting symmetry can reveal interesting results to a trader looking to determine the level of resistance for a stock or an index.
And, just like any puzzle, the pieces of the 21 exponential moving average (EMA) and the 61.8 Fibonacci retracement level coming together with the 4,400 price action on the S&P 500, could all present well into a picture-perfect setup in this example.
Choose Fibonacci levels, charts, time frames
There are four numbers of the Fibonacci retracement levels – 76.4, 61.8, 38.2, and 23.6 – which are based on ratios.
A preferred time frame of Simpler traders when following Fibonacci levels is the 39-minute chart which divides the 390-minute cash session into evenly divided bars. This time frame can sometimes be more beneficial to traders as it gives more signals than the 30-minute chart.
Simpler’s traders use this Fibonacci and 39-minute time frame combination to find squeezes signaling a rise off the lows. This alone can be a key signal to market movement in the current volatile environment.
Fibonacci is not a crystal ball
No trading strategy is foolproof. Fibonacci tools can yield results for traders who learn and apply these signals within their strategies. Who doesn’t want another tool in the trading toolbox to find clean, symmetrical relationships in price action?
Fibonacci also allows Simpler’s traders to “stay in the trade” longer than others who might not make use of this tool.
Keep in mind, Fibonacci levels can’t predict the future. This tool does not take into account current events or spontaneous market trends that no one knows in advance. However, it can assist with finding levels of support and resistance for potential buying opportunities.
Our traders work to identify stronger trade possibilities when others are sifting through the volatility, depending on general odds or hope. Fibonacci is backed by history and science, not emotion.