What is Fibonacci trading, and does this tool work? It’s a visual technical analysis indicator that uses math to calculate a stock’s support and resistance levels. Fibonacci levels are a numbers series. Example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 are Fibonacci trading levels. Each new number is the addition of the two numbers before, which are added together.
Fibonacci trading uses levels figured out by math to find entries, exits, support and resistance, and stop loss levels. Let’s say, for example, that a stock moves up a dollar. Traders believe a pullback will happen within the Fibonacci levels, such as 23, 38, 50, 62, and 76 cents.
This trading strategy is one that many traders like to use for entries and exits. The video above gives you an in-depth look at the basics of the Fibonacci tool and how to use this strategy when swing trading.
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Table of Contents
Fibonacci Trading Introduction
The Fibonacci trading tool is a strategy developed thousands of years ago by the mathematician Leonardo Pisano. His nickname happened to be Fibonacci. I love finding Fibonacci in different ways, whether in the flower pedals or stock prices on a chart.
This trading strategy uses math to determine support and resistance levels. However, some traders almost see this as a crystal ball into a stock’s future and rely heavily on Fibonacci trading. As long as it works for you, that’s all that matters.
Fibonacci can be seen in nature, hence how the Fibonacci system came to be. In essence, this mathematician saw the correlation between numbers and nature.
Basics
Fibonacci levels are a series of numbers. For example, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 are Fibonacci trading levels. Each new number is the sum of the two numbers before it is added together.
These numbers correlate with natural spirals such as seashells, constellations, and the human body. How does this work with trading the stock market? The market trades in cycles. Those cycles form trends. A move in the same trend direction is known as an impulse. When a move goes against the trend, it’s a pullback.
It uses the retracement levels to see where pullbacks can reverse so that the price returns to the current trend. This can be very helpful in trend trading. Fibonacci retracement levels can provide entry levels on a trade. Why? Because when a stock is in a strong trend, Fibonacci traders believe pullbacks will happen at Fibonacci trading levels.
I love to use levels to target 50% bounces. When a stock breaks a trend and begins to bounce, I draw my retracement and target a 50% retracement to take profit. You have to know patterns, volume, price structure, and trend lines to get the best entries to make this work, and it takes time to master.
Fibonacci Trading Tool
Retracements are higher when the price is gaining or losing steam within trends. You can use Fibonacci trading for confirmation, both going long and short.
Fibonacci trading levels point out price levels you should be aware of. Why? Simply put, the Fibonacci tool has support and resistance levels.
It’s important to remember that Fibonacci trading is subjective. Stocks have many price swings throughout the day. This means not every trader will connect the same two points on retracement levels.
Check out the chart of $MRKR this morning. I use a 50% retracement as a target for day trading
How Do You Trade Fibonacci Levels?
How do you trade Fibonacci levels? It’s quite simple. These levels show important support and resistance zones. These zones are important guides showing when to enter and exit a trade. If the price holds retracement support, then buyers might go long. When the price rejects resistance levels, then they take a short.
Your price points may differ from that of another trader. You’d have to draw retracement levels on every significant price movement.
When the levels are grouped, that’s a clue that that is an area of significance.
Fibonacci Trading Pullback
Fibonacci trading has a few different strategies you can employ. The pullback strategy is one. A strong trend usually works best for the pullback method.
A strong trend using Fibonacci trading is seen as a stock with many highs with less than 50% pullbacks.
For day traders, Fibonacci trading works best on 5-minute charts only after the market has been open for at least a half hour.
Consider how the price reacts around different retracement levels after finding the morning high of the day. If you see trading slowing down or turning, you can place an entry.
You can even use the high of the day or the highest Fibonacci target level as a price point to close out the trade. Have a plan and trade the plan.
Things go wrong in trading all the time, so expect it. Price may not reach the retracement level you thought it would, and that’s ok.
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Fibonacci Trading Breakout
Did you know that breakout trading has the highest failure rate in the stock market? The reason for this is that breakouts often end up being faked out.
It can often be market makers getting traders to bite to close out a trade, which causes the price to fall again. Fibonacci trading uses extensions to confirm real breakouts. Traders see that as a breakout confirmation once the price clears an extension level and keeps moving in the trend direction.
However, you must ensure you have volume along with the breakout. Volume is an incredibly important part of trading. If you get in a trade with no volume, you will be stuck in that trade for a while. If you’re under the PDT rule, your funds can be tied up in a trade that isn’t working out for you while you watch better trades happening.
Final Thoughts
Volume plays a huge role in Fibonacci trading. Look at the volume when the price reaches retracement levels, along with a candlestick that falls into your trading plan.
If volume decreases at key support levels, i.e., retracement levels, that doesn’t mean interest in the stock is waning. It most likely means that sellers aren’t going to push prices below support.
Hence, buyers come in, and the price moves back up. The float can be a catalyst to the volume of a stock. Low-float stocks tend to move more quickly than higher-float stocks.
Fibonacci trading isn’t going to pinpoint exact market and stock turning points. However, it can be great for estimating them. They can act as confirmation.
You don’t need Fibonacci trading to be successful, however. Play around with them, and if you find that they’re helpful to your trading style, then implement them.
