It’s a long story and an very important one for all traders – what Fibonacci is about.
Why is Fibonacci so powerful? It is an operating principle in nearly every sphere of our existence. Some have referred to it as the hand of God or God’s fingerprint.
Fibonacci in socio-economics
After many months of interacting with the markets, I’ve come to some understandings which I share. I will cut this down to the essence of it. However, much individual study is required – as well as interaction with markets (preferably on demo accounts).
At the core of the concept, Fibonacci is an indicator that you draw manually on charts that gives you an idea of the probability where price may go next. The larger the percentages the greater the probability of a move in the opposite direction. But it’s not possible to say exactly how much the probability is. How you interpret Fibonacci lines and how you draw them are the bare basics. How you use them is more challenging. Fibonacci doesn’t rule the market. The markets rule Fibonacci. And Fibonacci may not be reliable in certain situations. I feel a need to emphasise the latter. Extremely bearish or bullish markets disrespect Fibonacci like nobody’s business.
You do not need to do any mathematics to draw Fibonacci lines. Every trading platform that provides Fibonacci will do the mathematics in the background, allowing you to focus on the lines.
I pause to over-emphasise, that Fibonacci is an aid. It’s a tool. Fibonaccis are not meant to be used on their own. It doesn’t work for you. You work for it! Like any tool – if you don’t use it right, you will suffer. Think of using a hammer to drive a nail into a piece of wood. Watch your fingers! LOL. To nail the market you will need several tools working together. Sometimes you will hurt. It’s a wild thing and it will bite back at you. You can’t cage this animal with just a simple ‘net’. You might need nets, harpoons, knifes, or more powerful ‘weapons’ all together, to conquer the beast. But the ultimate thing that needs to be caged is your own emotions. See: the true list of enemies.
Moving on – there are two basic types of Fibonaccis: 1. Retracement 2. Extensions. Each of these have particular uses but this is not a tutorial so I do not go into how to use them. The video’s below and other links will show more. I do not go on to explain Fib extensions – the have separate uses and I don’t want to confuse the whole thing. They can be used to estimate exit targets. In essence Fib extensions are drawn using the same points you would use for a retracement, but you do them in the opposite direction.
What do the lines mean?
There are some fancy numbers usually attached to each of the lines. Those numbers give a probability estimate that price may reverse. But is isn’t as simple as looking at the numbers and saying ‘the 61.8 Fib line means it’s 62% chance price will reverse’.
How do you begin to draw the lines?
The rule is that for a Fib retracement you start from the start of the trend change to the end of the change in price. For more see: How to draw. You decide where the start and end of a trend is. There may be many other ups and downs in between. In this, you use your eyes to tell you where you see the start and end of a trend. It’s your decision.
Important videos below – some of these are quite advanced. It will take take time to digest. Beginners are guaranteed to be confused by much in these videos. It is not possible to ‘understand’ Fibonacci simply by watching these videos. Understanding will come with experimentation of charts and in demo accounts. It’s taken me hours of study to grasp much of this – and I’m still no expert at it. It may become quite confusing or even mind-boggling, when several fibonacci lines are drawn. It’s best to stop and rewind to see what’s happening. Self-directed learning is also necessary. So read up or view other videos online. Be careful though, some so-called experts have confused retracements with extensions.
Fibonacci has other applications in Elliott Wave theory. The latter is an advanced method of assessing chart patterns that is even more mind-boggling. I’d recommend that new traders do not go near Elliott Wave Theory until there is a sound working knowledge of the basics of Fibonacci.
What is a Fibonacci extension?
This confused me for quite a long time. Why? Because there is also a Fibonacci extension tool on Tradingview – and because they are also called ‘projections’. To make this simple, a Fib extension is where you draw the Fib in the opposite direction to what you would have used to draw a retracement. So – if you would draw a retracement pattern from X to A on some chart, for an extension you simply draw the fib from A to X!! How simple is that?!! So to get an XA extension or projection, you draw from A to X!! Crazy – but that’s how simple it is. I don’t know why these things have meaning or how they work to predict patterns of price, all I know is that they’ve been tested over many years. Look – I don’t exactly know how a plane flies or how my computer works. All I know is that it works. Got it?
1. Beginner strategies using Fibonacci
2. Use of retracements and extensions
3. Secrets of Fibonacci
4. Using Fib Extensions