Fibonacci retracement lines, as a commonly used technical indicator, are often used by traders to identify support levels, stop loss levels, and entry points. Compared with most commonly used indicators, Fibonacci retracement lines are more advanced and can help traders make better trading plans.
This time we will learn about the application of Fibonacci in the following order
What are Fibonacci retracements?
How to draw it?
How to use it to set up an entry?
How to position this stop loss?
Summarize
What are Fibonacci retracements?
The Fibonacci sequence was proposed by Italian mathematician Fibonacci in his 1202 book "Book of Calculus". It was introduced using the example of rabbit reproduction and is also known as the "rabbit sequence". Each term in the sequence is equal to the sum of the previous two terms, such as 1, 1, 2, 3, 5, 8, 13, 21, 34... The larger the value of the sequence, the closer the ratio between the previous and next numbers is to the fixed value of 0.618. Therefore, 61.8% has become Fibonacci's key ratio, also known as the "golden ratio".
The calculation of the Fibonacci horizontal line value is to divide the vertical distance between the high and low of the upward or downward trend by several Fibonacci ratios, and the resulting value is the possible support or resistance level. Commonly used are: 0.236, 0.382, 0.5, 0.618, 1. The meaning of these ratios is: when the price moves in one direction, a callback may be blocked at a predictable horizontal line, and then the price will resume its original direction and continue to move.
How to draw Fibonacci retracement lines
When the market is rising, select the low and recent high points, and use the Fibonacci retracement technical indicator to pull directly from the price low point to the high point
When the market is falling, select the previous high and the recent low. Use this indicator to click on the price high point and pull directly from the high point to the low point.
For example, the daily chart of USD/CHF, calling the Fibonacci retracement level in an uptrend, is as follows
It can usually be used in combination with other tools to provide traders with more accurate entry, take-profit and stop-loss information.
1. Set up entry
Combined with trend lines
Based on the market signals, draw a trend line with three verified points within a certain period to determine whether the future market trend will be up or down. After determining the trend, use the Fibonacci retracement line to find a more accurate entry signal.
Combining support/resistance levels
First determine whether the market is rising or falling, and then use the Fibonacci retracement line to find the support or resistance level. If it is rising, find the resistance level, and if it is falling, find the support level.
If it is broken, it suggests that the current market trend will continue, and you can trade in line with the trend at the break.
For example, in the daily chart of USD/CHF, during the rising process of the market, find the relative highs and lows, and call out the Fibonacci retracement line. After breaking through the 50% retracement line for a period of time, the price pulls back to 50%. After three tests, it has not actually fallen below the 50% retracement line to go down, indicating that the market has encountered resistance to the rise here. At this time, traders make trending trades, and the entry position can be chosen near point B or point A.
Combined with K-line patterns
In trading, it is often used in conjunction with the K-line that is about to lose momentum to determine the future trend of prices.
For example, if the euro is falling against the dollar on the daily chart and there is a long period of consolidation, we can use the Fibonacci retracement line to find an entry point.
First find the high and low points of the market, and draw the Fibonacci retracement line, as shown below
After the low, the price stabilized at 38.2%, and then there was a strong upward candlestick to retest this horizontal line. Here we should observe whether the price will continue to rise and test the next horizontal line.
As can be seen from the figure, a pin bar pattern with a long upper shadow appeared at the 38.2% retracement line, which indicates that the price is likely to reverse in the future and is a signal to enter a short position.
2. Set a stop loss
Generally speaking, if you are ready to enter the market at the 38.2% retracement level, the stop loss can be set below the 50% retracement level, and so on. If the entry point is at the 50% retracement level, then the stop loss can be set below the 61.8% retracement level.
Taking the four-hour chart of the euro and the dollar as an example, the price reached the 50% retracement line and then came back, which means that 50% is the pressure line, which suppresses the price increase. Then the stop loss can be set below the 61.8% retracement line.
The stop loss space is relatively small, which is more suitable for disconnected traders. Long-term traders can set the stop loss at the high point of the market to effectively reduce tension and pressure in actual combat.
In addition to finding entry positions and stop loss positions, Fibonacci retracement lines can also be used to set take profits. Combined with Fibonacci extension lines, find resistance or support levels, determine the level where the trend will end, and then determine the take profit position.
When planning a trading strategy, use two sets of retracement lines in superposition. The overlapping points will form strong support or resistance. Once these points are broken, the market will reverse. Combined with the moving average to capture the market, the overlapping part of the two is a good opportunity for traders to capture subsequent market trends.
Summarize
Although the Fibonacci retracement line also has its shortcomings, it does not affect it as one of the technical analysis indicators favored by traders. It has three important levels: 38.2%, 50% and 61.8%. The price usually gets the greatest support or resistance at these three levels. In actual application, traders can flexibly move according to their actual situation.
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