Lesson 7: Fibonacci Trading: What Is It and How to Use It?

Assume you ask technical traders the indicators they use to identify the potential support and resistance level. I call dibs that at least half of the answers are Fibonacci Retracement.  

Due to its popularity, trading using the Fibonacci level is almost a self-fulfilling prophecy. With more than half of technical traders using this method, the market is likely to move according to their sentiments.

Lesson Highlights

• Fibonacci retracement follows the idea that market trends tend to retrace back to a certain percentage of the previous move before continuing in the direction of the primary trend.
• The common retracement levels Fibonacci traders look at are 23.6%, 38.2%, 50%, 61.8%, and 100%.
• When looking at the Fibonacci retracement levels, a trader should look at the downtrend or uptrend of the market.

Overview of Fibonacci Trading 

Technical traders widely use the Fibonacci level because of its popularity and historical significance in online trading.  

Popularity... Really?  

Well, the popularity of the Fibonacci theory in technical analysis makes the predicted levels accurate most of the time. Remember, one main driver of the financial market is market sentiment or how the traders behave in the market. 

Hence, if most traders follow the support and resistance levels from the Fibonacci calculation, you can expect the market to follow suit. As I’ve said, it’s almost like a self-fulfilling prophecy.  

Okay, don’t be overwhelmed because we won’t be measuring the golden ratio here. In online trading, the Fibonacci ratio is mainly used as an indicator that suggests the upcoming support and resistance levels. 

Here are the ratios you need to know when you incorporate the Fibonacci into your trading: 

1. Fibonacci Extension: 0, 0.382, 0.618, 1.000, 1.382, 1.618 
2. Fibonacci Retracement: 0.236, 0. 382, 0.618, 0.764 

Essentially, you use the Fibonacci Retracement to identify the potential support and resistance level within the existing or current price trend. Meanwhile, the Fibonacci Extension projects the potential price targets based on the initial price movement.  

How To Use Fibonacci Retracement? 

Let’s assume that you have the Fibonacci indicator plugged into your account. Have you noticed the horizontal lines in your price chart? Well, that’s the Fibonacci retracement level.  

It suggests the potential support and resistance level when the market went in a reversal direction. It basically follows the principle that the market price retraces back to the previous level before going back in its trend direction.  

The Fibonacci levels are expressed in percentages based on how much movement the price has retraced. Here are the retracement levels of Fibonacci; 

• 23.6% 
• 38.2% 
• 61.8% 
• 78.6% 

Aside from its almost self-fulfilling nature, the Fibonacci retracement is useful because it provides two extreme price points: the market high and low. With these price points, the indicator offers historical and data-driven levels of support and resistance. 

Finding the Fibonacci Retracement Levels 

You don’t have to do math just to find the Fibonacci retracement levels. When you have the Fibonacci indicator installed on your price chart, it’ll automatically show you the Fibonacci levels for the specified period.  

However, it may take some treasure hunting just to find these levels. To do it, see the recent and relevant Swing Highs and Swing Lows. After finding these price movement data in your price chart, you’ll perform different actions depending on the data you’re looking for, such as downtrends and uptrends.

1. Downtrends: Click on the Swing High and drag it to the recent Swing Low.  
2. Uptrends: Click on the Swing Low and drag it to the recent Swing High.  

For the next lesson, you’ll explore the concept of moving averages and how it helps technical traders in predicting the potential price movement.