Fibonacci made easy
Hello there, Protraders!
Today I would like to present one of the most interesting phenomena in the investment community - the Fibonacci ideology which creates foundation for Fibonacci tools.
Leonardo Fibonacci was an outstanding mathematician living in Pizza in XII-XIII century. As a result of his work he left numerous inspiring mathematical problems but also Fibonacci sequence and Golden ratio. Fibonacci work were deeply studied and broadly adapted in market environment of XX-century. Theory behind Fibonacci is everywhere on the internet so we will focus here only on basic facts. Fibonacci sequence is made by adding two consecutive numbers to each other starting from 0 and 1. Therefore it starts this way:
0, 1, 1, 2...
Because 0+1 = 1 and 1+1 = 2, and so we receive the whole sequence:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89...
Now we retrieve the Golden Ratio and other Fibonacci ratios by dividing these numbers by following ones. Therefore:
34/55 = ~0,618
21/55 = ~0,382
13/55 = ~0,236
There is also ~0.764 ratio as a result of substraction 0,236 from 1,000 but I believe that it's not an original Fibonacci ratio.
From proportions of these numbers we can also extract some expansion values:
89/55 = ~1,618
89/34 = ~2,617
These ratios and numbers are considered to be part of natural order in our world and universe because they can be often meet in nature.
There are many different ways of using fibonacci numbers and proportions. In general fibonacci tools are used on markets to measure future price advances using recent history as a base of calculations. People use it to determine supply/demand balance or time to price relations considering Fibonacci proportions as an universal law. From here I would like to provide you some insight into basic ways of using Fibo in trading. The Protrader platform provides you with whole set of Fibonacci tools:
Pic: The Protrader platform provides you with whole set of Fibonacci tools
Fibonacci Retracement - it is most basic Fibonacci tool that is very popular. With this tool you are able to estimate key levels at which trend tends to resume. These levels are based on two factors: distance between recent extremums and Fibonacci ratios mentioned above. So if we take a 100 pips move and we measure Fibo Retracements on it, we will receive potential S/R levels on 23,6 pip, 38,2 pip and 61,8 pip. A shallow retracement will occur when market has strong upward tendency and more probable levels to reverse the correction will be 23,6% and 38,2%. With undecided market we have risk of deep correction to 61,8% or 76,4% or even 100%. This tool is widely used by harmonic traders to perceive harmonic formations occurance.
Fibonacci Expansion - it is also often used tool, especially for measuring some harmonic formations like AB=CD and other. For this tool it is also required to identify impulse, wave, trend (depends on terminology you like). Then we need to wait for corrective move to end - you can use Fibonacci retracement to determine possible levels. Now we can measure probable range of next wave with few potential target levels measured from the end of correction: 61,8%, 100% or 161,8%.
Fibonacci Arc - it is tool similar to retracement but also it refers to time somehow. Here Fibonacci ratios are not levels but semi-circle or circle shaped boundaries based on wave's proportions. Thanks to that measuring the retracement depends more on price dynamics. This way of thinking is also typical for Gann, who introduced 45 degrees trend line to identify trend's dynamics.
Fibonacci Elipse - it is another variation of Fibonacci proportion combined with geometrical figures. Here price (vertical) values are determined by Fibonacci's ratios and time (horizontal) is determined by duration of wave that we are measuring. Trading with this tool becomes more dependent on price dynamics than in case of previous tools.
Fibonacci Spiral - it is built on proportions between Fibonacci numbers. The basic Fibo spiral is made of circle quarters with radius equal to subsequent Fibonacci sequence's numbers. This determines Fibo ratios.
Fibonacci Phi-Channel - channel made on the base of normal channel with parallel lines that are creating many parallel channels. It's good for measuring accelerating or decelerating trends that break either band of channel. If you look for resistance or support in such case, phi-channel could be your choice.
Fibonacci time goal tool will help you to determine some future periods based on significant moments in past and fibonacci proportions. If you take i.e. two lows and connect them with Fibonacci you will take time that passed between these two lows and tool will extend that time to 61.8% and 100% and so on into the future. This way you can acquire moments in time which may happen somehow important, i.e. another low, or some supply/demand shift.
Protrader 3 allows you to set main parameters same as in case of other drawing tools like: color, line style, visibility, but also ratios of levels. So if you want, you can change 'magical' ratios to some other 'more reasonable' such as: 25%, 50%, 75% or 100%, 200%, 500% or whatever else you like. Thanks to that Fibonacci tool becomes pretty useful, standard tool which you could use to measure certain momentum levels with desired values.
Now let's take a look, how price advanced during following week.
Fibonacci Retracement tool showed us correctly the moment of reversal.
Fibonacci expansion showed us some possible range for upward move. Actually it happens that price couldn't make it any higher and week closed right below first expansion of 61.8%.
To conclude, Fibonacci ratio can be used to anticipate some key moments in future. But it's just some prognostic tool, please regard it rather as a clue not a strict signal or absolute prophecy. Moreover using this tool requires lot of practice. Fibonacci proportions on markets are generally hard to rationale although many tried. But on the other hand these levels are working too often to be just simple coincidence. Therefore, I guess, their almost mystical influence on price is an object of interest of so many traders. I have this hope that this article has inspired you to make your own research about Fibonacci and to try to apply it into trading, because there obviously is a good potential in this tool.
For more knowledge about Fibonacci numbers you may visit:
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