In this lesson we talk about the Fibonacci sequence and its applications in technical analysis in trading. We will make you very curious, so get ready to spend the next few minutes on a path of math and mystery.
To better appreciate this lesson and discover how Fibonacci numbers are applied, we recommend practicing with a safe and easy-to-use trading platform, which can be accessed from this page .
The Fibonacci sequence
Fibonacci was an Italian mathematician to whom we owe the famous sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc. As you can see, each digit is equal to the sum of the previous two (for example, 3 = 1 + 2, or 55 = 21 + 34). This sequence can be continued indefinitely.
This sequence is presented by many as the “sequence of numbers that explains the nature of things” and has been studied (and is still being studied) by many mathematicians, physicists, and philosophers. For example, with it you can mathematically read the shape of galaxies, many forms present in nature and therefore it is no coincidence that it has been taken up by artists and architects to create the smoothest and most natural forms possible .
But why are these numbers important in CFD trading? Many traders use this scheme to establish the “frequencies” of the oscillators as well as the amplitude of the moving averages.
The Fibonacci retracement is a study of price corrections within a chart, analyzed using the numbers from the Fibonacci sequence, transposed to the following percentage levels: 23.6%, 38.2%, 50%, 61.8 %, 100%.
We provide the explanation below.
The ratio of two consecutive numbers in the Fibonacci sequence tends to 1.68 (the ratio of one number to the next). It tends to 1.68 progressively as it approaches infinity.
Numerous analysts, and therefore financial and trade scholars, have linked the duration and extent of price movements for stocks and other financial instruments with the numbers in the sequence. Well, the inverse of 1.68 or 0.618 (the ratio of each number to the previous one).
Now the ratio 0.618: 1.618 results in 0.382. This percentage is commonly used for » retracement «, a function that can be found in any technical analysis software and on the best trading platforms, under the name «Fibonacci retracement».
Retracement and extension percentages
In technical analysis, the most important retracement percentages fall into two categories and are:
a) Levels retreat
b) Extension levels – Extensions consist of all levels tracked below the 100% standard and are used by many traders to determine the areas in which they will want to profit.
Other applications of Fibonacci in trading
In trading, Fibonacci is very commonly used to measure time in futures markets and to estimate the magnitude of price changes . You understand that if you work with high capital for a short time, time and strength represent everything . If you use them well, you can make a fortune.
a) The days
To apply them, you can take a certain price, such as a new minimum or maximum point, and move along the abscissa axis along with the Fibonacci numbers. So, for example, 21, 34, 55 days ahead.
Many traders stick to these dates convinced that the original event is repeated in its concomitance. However, this does not always happen.
Similarly, day intervals equal to the numbers in the Fibonacci sequence can be taken into account to see if there is any logic in the shape of the charts and in the price formation.
b) The Arcs
Other traders use the so-called Fibonacci arcs, that is, they show three arcs at intervals established in the percentages 38.2%, 50% and 61.8%.
c) Fan lines
Starting from a reference trend line and with a common point of origin in the graph, with established intervals of 38.2%, 50% and 61.8%. Obviously, these percentages are calculated on the value of the value considered.
Does Fibonacci work?
The Fibonacci sequence is mathematical , so it cannot be argued. However, some applications are experimental and others are even “religious.”
Others, on the other hand, are based on very deep studies, such as Elliott wave theory, which verified the statistical reliability of the levels identified with the Fibonacci sequence.
If you found this interesting lesson, you can turn these words into facts by looking at the Fibonacci lines on the eToro platform , which you can access with quick sign-up and no deposit.
Go to the next lesson on Wedge.
Fibonacci lines faq
What are Fibonacci lines?
They are lines on the price chart, calculated based on percentages defined by the Fibonacci sequence.
What are the Fibonacci retracement levels?
Levels reached, which are expected to indicate the continuation of a trend or its reversal.
Which are the Fibonacci retracement levels?
Fibonacci retracement levels are set in percentage levels calculated from the high and low points, equal to 23.6%; 38.2%; 50.0%; 61.8%; 76.4%.
What are Fibonacci fan lines?
Starting from a reference trend line, they are lines that have a common point of origin on the graph, with established ranges of 38.2%, 50% and 61.8%.