Loding Loading ...
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Fibonacci trading strategy

Find out how you can use Fibonacci retracements to predict future potential price support & resistance levels in the financial markets.

Fibonacci retracements are a popular form of technical analysis used by traders in order to predict future potential prices in the financial markets. If used correctly, Fibonacci retracements and ratios can help traders to identify upcoming support and resistance levels based on past price action.

Leonardo Fibonacci was a mathematician born in 1170 AD. From his work, we get the Fibonacci sequence of numbers, and also the well-known Fibonacci golden ratio. The Fibonacci sequence is a series of numbers where the next number is simply the sum of the two preceding numbers. So for example, it would run 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on.

It is based on the rate of reproduction of two theoretical rabbits and the subsequent population growth if the following generations continued to reproduce. At first glance, it may seem somewhat confusing to find that there is a connection between a 12th century mathematician, the rate at which rabbits reproduce and predicting the future direction of the financial markets using technical analysis. So, why is this series of numbers so important for traders?

Fibonacci's golden ratio

The focus tends to be on the ratio between the numbers in the sequence. This is considered to be the most important part of Fibonacci's work. Any number in the series divided by the previous number gives us 1.618 as we get further down the series. This is known as the 'Fibonacci golden ratio'. For Fibonacci followers, there are plenty of examples in nature adhering to this ratio (or the inverse of the number, 0.618). It seems to have played an enormous part in the building blocks of everything around us.

For example, if you divide the number of female bees by male bees in a hive, you will get 1.618 as the answer. For sunflowers, each new seed is 0.618 of a turn from the last one. Fibonacci also applies to humans as well. There are lots of instances of this golden ratio working in relation to our bodies: one example is the ratio of the length of your forearm to your hand, which is 1.618.

Fibonacci’s golden ratio example

In financial markets, the Fibonacci golden ratio has the same mathematical base as the natural phenomena mentioned above. When traders use the golden ratio in their technical analysis, the ratio is usually translated into three percentages: 38.2% (often rounded to 38%), 50% and 61.8% (usually rounded to 62%). Having said that, traders can use more multiples when necessary, such as: 23.6%, 161.8%, 423%, 684.4% and so on.

Fibonacci retracement levels

The argument of Fibonacci followers is: if so much of nature and the world is made up of these Fibonacci ratios, surely the same would apply to the markets too? Analysts can use this approach when learning to trade Fibonacci through its retracements. Let's say for example that a market has risen and, similar to all markets, it doesn't move in a straight line and starts to fall back. Traders will look at Fibonacci ratios to try and figure out where the fall may stop and the market will resume its previous rise.

What is the Fibonacci sequence?

The golden ratio of 1.618 – the magic number – gets translated into three percentages: 23.6%, 38.2% and 61.8%. These are the three most popular percentages, although some traders will also look at the 50% and 76.4% levels. 50% is not a Fibonacci number, but has proved to be a generally popular number when correcting a primary or secondary price move. For now, we will focus on the 50% and the two more popular Fibonacci percentages of 38.2% and 61.8%.

These are then applied to the chart to try and figure out potential hidden levels of support or resistance in the market. When the market drops back to 38.2% of its previous rise (the first major Fibonacci retracement), traders will check to see if any buyers come in. If this 38.2% level gets broken, then the expectation is for the 50% retracement to be the next target. If the market slides through that 50% retracement level, then traders will look to see if the market finally stops its decline when it has retraced 61.8% of the prior move. For most Fibonacci followers, if it breaks through that 61.8% level, it means that the market direction is going back to where it started.

We can create Fibonacci retracements by taking a peak and trough (or two extreme points) on a chart and dividing the vertical distance by the above key Fibonacci ratios. Once these trading patterns are identified, horizontal lines can be drawn and then used to identify possible support and resistance levels.

An example of the Fibonacci pattern

This example shows the rise in the price of Crude Oil West Texas (also called WTI Crude Oil), which is part of the commodities market. The market then stalls, making it possible for traders to apply some Fibonacci retracements to that rally, to see where support comes in. As can be seen, the price does slide back but although briefly probing through, the 38.2% retracement in the $35 area does end up providing some support. The market rebounds and moves out to fresh highs for the recovery.

Trading falling markets

Fibonacci trading doesn't just apply to rising markets. If a market has fallen, then Fibonacci fans will apply the retracements to bounce back up. Let’s take an example of a market that has dropped 100 points. If it rallies 38.2%, then those looking at Fibonacci retracements will expect the rally to run out of steam. If that level is broken, then the 50% level is where traders would look for the market to turn back down. And finally, if that one gets broken then a 61.8% retracement of the down move is the next target, with a break here suggesting that the market will go all the way back to where it started the fall.

The next chart shows the drop in GBP/USD. The currency pair fell from the 1.5200 area to 1.4100 before stabilizing. As the market stabilized, Fibonacci retracements could be applied to this fall. It can be seen that when the market had bounced back by 50%, the recovery ran out of steam and the slide resumed. This is an example of a Fibonacci retracement helping us to figure out when to sell short in a downtrend.

Not everyone is a fan of the Fibonacci approach to market analysis. Some just see the levels as a self-fulfilling prophecy as so many people are watching them, and not having any particular 'magical' properties. However, even for the sceptic, it can give an extra level of insight to potential market turning points that may not be clear at first glance.

Source: CMC Markets UK

Disclaimer: Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part.

PLEASE READ THE FOLLOWING TERMS AND CONDITIONS OF ACCESS FOR THE PUBLICATION BEFORE THE USE THEREOF.

By use of the publication and continuing to access the publication, you accept these terms and conditions and undertake to be bound by the acceptance. CFC reserves the right to amend, remove, or add to the publication and Disclaimer at any time without any prior notice to you. Such modifications shall be effective immediately. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by CFC and shall be of no force or effect.

No information as given herein by CFC in this publication should be construed as an offer, recommendation or solicitation to purchase or dispose of any securities/financial instruments/products or to enter in any transaction or adopt any hedging, trading or investment strategy. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige CFC to enter into any transaction.

The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. CFC cannot be held responsible for the impact of any transactional costs or any taxes as may be applicable on transactions.

Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that CFC considers reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. The articles does not take into account the investment objectives, financial situations and specific needs of recipients. The recipient of this publication must make its own independent decisions regarding whether this communication and any securities or financial instruments mentioned herein, is appropriate in the light of its existing portfolio holdings and/or investment needs.

This document is a marketing material and has been prepared by individual(s), marketing and/or research personnel of CFC. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is purely a marketing communication. In this publication, any opinions, news, research, analysis, prices, or other information constitute is a general market commentary, and do not constitute the opinion or advice of CFC or any form of personal or investment advice. CFC neither endorses nor guarantees offerings of third party, nor is CFC responsible for the content, veracity or opinions of third-party speakers, presenters, participants or providers. CFC will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Charts, graphs and related data or information provided in this publication are intended to serve for illustrative purposes only. The information contained in this publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. CFC expressly disclaims any obligation to update or revise any forward-looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

Staff members/employees of CFC may provide/present oral or written market commentary or analysis to you that reflect opinions that are contrary to the opinions expressed in this research and may contain insights and reports that are inconsistent with the views expressed in this publication. Neither CFC nor any of its affiliates, group companies, directors, employees, agents or representatives assume any liability nor shall they be made liable for any damages whether direct, indirect, special or consequential including loss of revenue or profits that may arise from or in connection with the use of the information provided in this publication.

Information or data provided by means in this publication may have many inherent limitations, like module errors or lack accuracy in its historical data. Data included in the publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, credit risk etc.

The use of our information, products and services should be on your own due diligence and you agree that CFC is not liable for any failure to achieve desired return on investment that is in any manner related to availing of services or products of CFC and use of our information, products and services. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained herein is not to be used as an indication for the future performance of any investment activity.

This publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this publication.

Services offered by CFC include products that are traded on margin and can result in losses that exceed deposits. Before deciding to trade on margin products, you should consider your investment objectives, risk tolerance and your level of experience on these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor and you should ensure that you understand the risks involved and should seek independent advice from professionals or experts if necessary.

trade-talks
brainy-bull
mental-funda
wow
get-started