What is the Fibonacci retracement and the Fibonacci ratio?
The Fibonacci retracement indicator was developed by the mathematician Leonardo Fibonacci in the 13th century. It’s formed by taking two markedly different points (highest and lowest) in the market and dividing the vertical distance by common Fibonacci ratios, which are 50%, 38.2%, 61.8%, 23.6%, and 100%.
When the levels are identified in a chart, draw a horizontal line to show the support and resistance areas. These areas can be used to place profit targets and stop losses in the market.
Fibonacci ratios are chosen by a sequence of numbers as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on, which means every number is a sum of the previous two numbers. One common characteristic of this Fibonacci sequence is that each number is approximately 1.618 times greater than the previous number. This characteristic forms the basis of the Fibonacci ratios used by technical traders to determine retracement levels.
How to read and use the Fibonacci retracement indicator
The Fibonacci retracement indicator is among the simplest and easiest-to-understand technical trading indicators available in the market. Despite it being a numerical indicator, it has a good visual representation of the important price levels in a given market. First, we need to know where to get our Fibonacci retracement tool on our charting platform:
How to add the Fibonacci indicator in Tradingview
Tradingview is a common trading platform offered by several brokers, and it contains very important charting tools. These tools include the Fibonacci retracement, which can be used easily by a beginner or an expert trader. To add the tool to a chart:
1.Click on the left drawing toolbar pane
2. Scroll down to the third option and select the Fibonacci retracement tool. Alternatively, you can use shortcut keys (ALT+F)
3. Draw your Fibonacci retracement lines depending on where a huge market movement occurred.
FIG 1: shows the Fibonacci retracement in the tradingview chart.
Which is the important Fibonacci ratio
The most commonly used Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels show potential areas in the market where the price can react when we have a Fibonacci retracement pullback.
The best and most important Fibonacci ratio is “61.8%”, which is viewed to be the strongest level among the Fibonacci retracement points. This level is also referred to as the “Fibonacci retracement golden ratio.”
FIG 2: shows important Fibonacci retracement ratios.
How to calculate the Fibonacci ratios
To calculate a Fibonacci ratio, you divide one number in the Fibonacci sequence by the number that follows it. Let’s take an example of the Fibonacci ratio of 61.8%, which is calculated by taking 21 divided by 34, which equals 0.6176, and then 55 divided by 89, which equals approximately 0.6178.
The 38.2% ratio is calculated by dividing a number in the Fibonacci series by the number located in two spots to the right. Let’s take an example, 55 divided by 144 equals approximately 0.38194.
How to draw Fibonacci retracement lines the right way.
Trading platforms offered by the best brokers in the market have made it easy to draw Fibonacci lines on the charts. When the market is in an uptrend, you can select the Fibonacci retracement tool on your chart for a given security, start from a swing low area, and drag the cursor up to a swing high area. The indicator will automatically mark the important ratios such as 61.8%, 50.0%, and 38.2% on the chart.
FIG 3: shows how to draw Fibonacci retracement in an uptrend market.
On the other hand, in a downward trending market, you can select the Fibonacci line tool, choose the swing high point, and drag the cursor down to the swing low price. The indicator will mark important ratios on the chart. Price action patterns like triple tops, triple bottoms, double tops, and double bottoms can be used to identify more important levels in the market.
FIG 4: shows how to draw Fibonacci retracement in a downtrend market.
Which timeframe is best for Fibonacci trading?
The Fibonacci retracement tool can be applied in any given market depending on the trading strategy and the ability of a trader to spot any significant move in the market. Day traders can use the 30 minutes to 1-hour timeframe to fully optimize their trades.
The accuracy of the Fibonacci retracement tool increases with an increase in the trading timeframe. Trading a 61.8% level in a monthly timeframe will increase the probability of getting into profit than taking a trade on a 61.8 % level in a 2-hour timeframe.
Which is the best fibonacci indicator
We have different types of Fibonacci tools that can be used in combination with other profitable trading indicators like OBV indicator, CCI, MACD, etc just to have an edge in the market. These includes:
- Fibonacci circle
- Fibonacci channels.
- Fibonacci timezone.
- Fibonacci spiral.
- Fibonacci speed resitance fan.
- Fibonacci wedge.
The Fibonacci retracement tool is by far the best indicator when we consider simplicity, ease of use, and understanding, both for a beginner and an advanced trader.
Fibonacci retracement EA mt4 download
Let me introduce you to Fibo Quantum, the best Fibonacci MT4 expert advisor. Since we have seen how the Fibonacci retracement tool works, this auto Fibonacci MT4 expert advisor robot will assist in making profitable trades.
Fibo Quantum has three trading styles that impact the speed of its signals. There are “Aggressive”, “Medium” and “Conservative” trading styles. You can try all of them and choose the one that best suits your own vision of trading and your preferences. Plus, for the more experienced traders out there, there is also a “Custom” trading style that allows users to manually configure signals and gives even more flexibility.
Instead of sitting glued in to catch lucrative price movements like the average trader does, with Fibo Quantum, you will get simple signal alerts to your phone and email every time there is a new trading opportunity. Fibo Quantum will also give you a signal when the buy or sell entry levels are reached so that you can immediately open your trade.
Fibonacci extension verses Fibonacci retracement
These two Fibonacci tools may look the same, but they have different characteristics. Fibonacci extensions suggest where the market will move after a retracement. On the other hand, the Fibonacci retracement measures a pullback within a given market trend.
FIG 5: Fibonacci extention levels.
Conclusion
- The Fibonacci retracement indicator is formed by taking two markedly different points (highest and lowest) in the market and dividing the vertical distance by common Fibonacci ratios, which are 50%, 38.2%, 61.8%, 23.6%, and 100%.
- To calculate a Fibonacci ratio, you divide one number in the Fibonacci sequence by the number that follows it. Let’s take an example of the Fibonacci ratio of 61.8%, which is calculated by taking 21 divided by 34, which equals 0.6176, and then 55 divided by 89, which equals approximately 0.6178.
- The best and most important Fibonacci ratio is “61.8%”, which is viewed to be the strongest level among the Fibonacci retracement points. This level is also referred to as the “Fibonacci retracement golden ratio.”
- Fibonacci ratios are chosen by a sequence of numbers as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on, which means every number is a sum of the previous two numbers.
Relevant Resources
https://mathshistory.st-andrews.ac.uk/Biographies/Fibonacci/
