Fibonacci and its use in technical analysisdeltafx writer 20 August 2021
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Fibonacci tools are technical indicators that show the important resistance and support levels with some lines. They are not limited to a specific chart, and you can use them on any chart. Many traders rely on Fibonacci tools as a great source that provides buying and selling signals. These signals help traders so much that they trust them more than any other indicator for their predictions. However, some traders don’t use them alone, and they think Fibonacci tools must be used with other forms of technical analysis to achieve the best results.
Leonardo of Pisa was the real name of the person who created this Fibonacci theory. He made it in the 12th century. Many years later, historians used the name “Filius Bonacci”, meaning son of Bonacci, for this mathematician. After many years it changed to Fibonacci, and we still use it.
Fibonacci’s number theory has attracted many supporters. They believe that these numbers are repeated in different fields such as nature, biology and architecture. But others think that these claims are just exaggerations. They believe that when many traders find these numbers meaningful and act together, they can shift the trend of a market.
The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, 78.6 and also 50% which is not officially a Fibonacci ratio, but some traders use it. This indicator can be applied for any two important price points (a high and a low point). Then the different levels will be drawn between these two points.
The golden ratio and Fibonacci sequence
One of the most well-known number sequences in the world is the Fibonacci sequence. Look at these numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, …
Can you guess the next number in the sequence? The formula is easy to understand, and you can see that each number is a sum of its two previous numbers. So, the next number in this sequence will be 144 (55+89=144). You can continue this sequence with the same formula forever.
As we said earlier, we can see some numbers in different fields in nature. By thinking about this sequence, you can see that by dividing each number by its previous one, you will achieve the following results: 1/1=1, 2/1=2, 3/2=1.5, …, 89/55=1.6181, 144/89= 1.6179, 233/144=1.6180
As you can see, the result of the divisions is about 1.618, which is called the golden ratio. However, some people call it the golden mean ratio, PHI, divine ratio, etc.
The Fibonacci sequence provides the necessary information to set the resistance and support levels. we can use them alone or in combination with other technical analysis tools to identify these levels. There are other theories that use this sequence, for example, the Elliott principle and the Dow theory.
When it comes to using the Fibonacci tool as a technical analysis tool, gold ratios with 38.2%, 50% and 61.8% are usually the most useful ones. You can apply the Fibonacci sequence to various diagrams using different methods, such as retracements, arcs, fans, and time zones.
Fibonacci retracement levels are horizontal lines that indicate the possibility of resistance and support levels. To draw these lines we must use the Fibonacci numbers. Therefore, each level indicates a valuation that reflects the price as a percentage of previous moves. As we said earlier, the retracement levels include 23.6%, 38.2%, 61.8%,78.6% and 50%, which is not officially among the Fibonacci retracement levels. The retracement levels offered on most trading platforms can be useful because they show potential correction levels of stocks, currency pairs or commodity prices.
We can draw the retracement levels by plotting the highest price to the lowest price. To this end, the first line will be 100% at the highest point of the chart, then the second line at 61.8%, the third line at 50%, the fourth line at 2.38% and the last line will be at 0% the lowest point. Then the support and resistance levels will usually form near these lines.
The Fibonacci arc, which has a semicircle shape, is an indicator of technical analysis and traders use it to find the hidden support and resistance levels. We can create this arc by drawing the first trend line between two oscillating points on the graph. First, we need to find the price ceiling and price floor on the chart. Then, we draw three lines with coordinates of 32.8%, 50% and 61.8% with a semicircular motion. These lines actually represent the same potential support and resistance levels.
The Fibonacci fan measures time and price changes. To draw these lines, an analyst divides the price difference between the highest and lowest prices by the ratios set by the Fibonacci series. Traders can use these lines to predict key support and resistance levels. Based on what they observe, they may expect prices to reverse. When traders identify patterns in a chart, they can predict future price movements and support and resistance levels.
Fibonacci Time Zones
The Fibonacci time zones include a set of vertical lines in which different fluctuations occur. To have a time-based technical index, we use these time zones. Interpreting Fibonacci time targets means looking for significant price changes near these vertical lines.
As demonstrated, Fibonacci levels are geometric numbers that will look spectacular when drawn correctly. These levels can display key support and resistance levels in many ways, such as retracement, fan or arc. You can predict the future prices of various assets to a large extent by Fibonacci levels and support and resistance lines. You should know that relying on this tool alone is not sufficient, and you should also use other technical analysis tools such as different indicators or even fundamental analysis.