Once you have become a trader, you need to develop your skills and improve your knowledge in the sphere of market trading. There are many different methods that traders utilize to earn money. One of the most excellent things is technical analysis, since the knowledge of how it works can give you some necessary skills to be a good trader. In general, technical analysis can be defined as an instrument for trading that evaluates assets and predicts their future actions by conducting an analysis of the data collected from past market trading activities.
One of the most well-known technical analysis tools is “Fibonacci.” This word is popular because many strategies are based on Fibonacci retracements. Usually, such strategy is called Fibonacci trading strategy or Fibonacci retracement trading strategy.
However, if you are a newbie in this sphere and do not know enough about Fibonacci retracement trading strategy, you need to start from the Fibonacci number sequence. This tool took its name after the math studies of L. Fibonacci, who created a number sequence, where every other number is the sum of two preceding numbers. It looks like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on – and the Fibonacci trading strategy is based on this sequence. However, it is better to say that they are based not on this sequence, but on the characteristic that it hides. According to the studies by L. Fibonacci, every next number is about 1, 618 times larger than the previous one, or every previous number has about 61,8% of the next one. Apart from this, every preceding number has about 38,2% of the number after the next one. Every preceding number has 23,6% of the next number after the next two. These numbers are called Fibonacci retracements or Fibonacci retracement levels, and relationship among them is called ratio. Exactly, this relationship, or ratio helps to create trading strategies based on the Fibonacci retracement.
If you look at a chart with the price movements, you will see that the price does not move in one direction for a long time. It tends to change its direction quite sharply. To become a beneficial trader, it is necessary to learn how to predict the price fluctuations. It is possible to use Fibonacci retracement trading strategy based on trends changes, breakouts, carry trades, and so on. It is also possible to use Fibonacci levels for different charts - especially with a candlestick chart. Due to the Fibonacci trading strategy it is possible to predict price movements. However it cannot guarantee success.
In the chart, Fibonacci levels look like horizontal lines. Every line has its own point. Usually, there are levels of 100%, 78%, 61,8%, 50%, 38,2%, 23,6%, and 0%. 50% horizontal line is not a Fibonacci line, but it is also very important for predicting price movements.
The next question is how to calculate these numbers. When you open a chart, you need to identify two price points – the highest and the lowest. The highest one gets a 100% level when the lowest one gets a 0% level. Other levels are calculated in accordance with the first two levels.
Fibonacci retracement lines are frequently utilized by traders who work with some trend strategies. As a result, you have a Fibonacci trading strategy based on the trend changes. When traders use it, they monitor the changes with a trend and try to open a position or to get out of it. In other words, they try to diminish any risk by using Fibonacci retracement lines.
The main function of Fibonacci retracement trading strategy is to show the reversal points. Basically, it can foresee how the trend will change - show the pullback, breakout, and average crossover. It is possible to compare the retracement lines with support and resistance levels. For example, when a candlestick reaches a point of 61.8%, which is one of the retracement levels, there is a high chance the price will change its direction. Usually, the most common levels that show such changes are 38,2%, 50%, and 61,8%. The Fibonacci retracement trading strategy is not that difficult, but it is necessary to pay attention to other components of the strategy. It is quite unwise to rely only on the Fibonacci levels.
Another vital strategy is a Fibonacci expansion strategy. Traditionally, traders look for support and resistance zones to generate some profit. However, it can happen that there is a situation when it is impossible to find them. If your target has not been in some area before, it is good to rely on Fibonacci expansion strategy because you will not find support and resistance zones. This strategy can help to identify possible support and resistance zones. It is also good to use this strategy when working with trends and currency pairs.
It is the right time to explain what Fibonacci expansions are. They are levels of the price that are developed by monitoring a primary price move and its retracement. Apart from this, it is also important to explain the difference between the Fibonacci retracement trading strategy and Fibonacci expansion strategy. The first system identifies how far the price level might originally go, when the second one identifies where the price level might go after the retracement exhaustion.
It is very beneficial to add Fibonacci retracement levels and expansion levels to the charts because they may help you to identify support and resistance zones and make more profit. Many traders use them very successfully.
Every Fibonacci trading strategy is advantageous and helps to foresee price and trend movements. However, it is necessary to understand that success cannot be guaranteed. They only help you to make right decisions. For this reason, it is important to get as much new information as possible to become a successful trader.