You may have heard the term of the “Fibonacci Tool” it derived from the Italian mathematician called Fibonacci. He created a mathematical sequence that starts with: 0,1,1,2,3 (to infinity) where the sequence of numbers is created by dividing the previous two numbers.
Essentially each number that is followed by the previous in the sequence is approximately 0.1618% larger than the number before it which in turn relates to the golden ratio.
What is the Golden Ratio?
The golden ratio relates to the Fibonacci sequence as everything in life as we know it relates back to the golden ratio. For example, the body lines on the Aston Martin sports car are proportioned to a height and width that equal to the amount of 5 to 8 which in turn is the 0.1618% as mentioned above.
Given that the golden ratio attracts everything in life whether it be body lines on cars, atoms or a math sequence this can be used to a trader’s advantages when trading forex or bitcoin.
How To Use Fibonacci Tool When Trading?
Before analyzing your charts, it is essential to first map out the high’s and low’s of the current chart you’re looking at which is also known as support and resistance.
Resistance as seen below can be thought of as a wall that you cannot get through, therefore price will reach that area and drop as there are sellers awaiting to sell around that region.
Support can be thought of as a floor that price cannot push down any further as there is buyers around that region awaiting to go long or to purchase the instrument.
When using the Fibonacci tool you must start by plotting the tool at the lowest price followed by potting it at the second price if you’re in a trending market that is going up or if you believe price is going up, when selling you just do the inverse of going long.
Since you plotted out the previous areas of support and resistance and if the 0.61 area of the Fib aligns with the support or resistance you can either go long or short depending on your setup, due to the fib aligning with previous support or resistance you have a likely chance of price going your direction as you now have confluence with your trading plan.
Things To Note
Although the Fibonacci Sequence is seen throughout the earth and aligns with everyday actions, when trading it can be seen as a “self-fulfilling” prophecy where other traders are trading the same action because they believe in it too. However, this can also be seen as a positive thing as if other traders are going long due to the confluence of the Fib sequence you can bet it can cause price to go towards your direction due to the volume of trades that are going your way.
The Fibonacci Sequence is a beginner tool that is a must-have in your arsenal as you can dictate to where price may exhaust or create a pullback before going long or short, it is also useful to determine where other traders/institutions may be trading at.