Leonardo Pisano, better known by his nickname, Fibonacci, was an Italian mathematician born in Pisa in the 12th century. He is known to have discovered the Fibonacci numbers, said to be based upon observations of the Great Pyramid of Gizeh in Egypt. Fibonacci Numbers are a sequence of numbers where each successful number is the sum of the two previous numbers.
Eg 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
It is the ratio of the Fibonacci sequence that is significant, rather than the actual numbers in the sequence. The quotient of the adjacent terms in the series possesses an amazing proportion, roughly 1.618, or its inverse 0.618. This proportion is known by many names: the golden ratio, the golden mean, PHI, and the divine proportion. The dimensional properties that exist to the ratio of 1.618 occur frequently in nature. Examples are as diverse as mollusk shells and the shapes of galaxies containing billions of stars.
Fibonacci jumped into the technical mainstream late in the bull business. Futures traders had it all to themselves until real-time software moved it over to the equity markets. Its acceptance exploded as retail traders experimented with its math and discovered its many virtues.
Fibonacci ratios describe the communion between trend and counter trend markets – 38%, 50% and 62% retracements form the primary pullback levels. Apply these percentages after a trend in either direction to predict the amount of the counter trend swing. Stretch a grid over the most obvious up or down wave, and see how percentage cross key price levels.
Convergence between pattern and retracement can point to excellent trading opportunities. Keep in mind that retracements work poorly in a empty space. Always examine highs, lows and moving rates to confirm the importance of an absolute level.
Animosity between retracement and the under pattern pattern generates babel instead of profit. Move on to a fresh chart when nothing lines up right. This aberration generates most of the whipsaw in a price chart. Additionally, strong phasing between Fibonacci and pattern exposures strongly foreshadowing reversals at accented asking prices.
Let's look at a couple tricks to amend your Fibonacci skills. Add these twists and turns to your toolbox and apply them to your next trade.
First Rise / First atocity marks the first 100% retracement of a trend within your time frame of activity. It provides an early adaptation warning after a new high or low. The 100% retracement violates the major price direction and terminates the trend it corrects. From this level, the old trend can re-create itself if it breaks through the old 38% level. More often, traders will use that level to enter low-risk positions against the old trend.
Parabolic movement tends to occur between the 0% -to-38% and 62% -to-100% Fibonacci levels in all trends. This affinity offers a great agent for finding the big moves when searching for trades. Watch for bottlenecks to form at the 38% or 62% level. Then use a simple escape or break approach approach when price moves past it. The next advance can be alcaic, with price moving like a magnet back to an old high or low. Of course, the strategy only works when you can find these levels in advance.
Many traders can not figure out where to start a Fibonacci grid. Here's a trick to help you place it where it'll do the most good. The absolute high or low in a price wave is not the best starting point for a grid most of the time. Instead, look for a small double bottom or double top within the bottleneck where the trend began. Accent one end of the grid over this second high (or low), instead of the first. This will capture a specific Elliott Wave that conforms to the trend you're trying to trade.