It is important to understand the Fibonacci sequence and its mathematical properties. There is nothing difficult about it even though some consider it the mathematical puzzle. In other words, the Fibonacci sequence is a sequence of numbers where, after 0 and 1, every number is the sum of the two previous numbers:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610….
Leonardo Pisano Bogollo, an Italian mathematician, first introduced the Fibonacci sequence in the 13th century. There are some interesting relationships between these numbers that form the basis of Fibonacci numbers trading. Do you see a beauty of simplicity and elegance?
The Fibonacci indicator became very popular among traders around the world. It is used to predict the completion of the correction or the reversal of the trend.
You can find the Fibonacci Indicator in the terminal from Pocket Option under the Pencil as shown in the screenshot below:
Little Bit of History
Leonardo Pisano (Fibonacci) was an Italian mathematician born in Pisa in the year 1170. The young Leonardo studied mathematics and discovered the advantages of the Hindu-Arabic numeral system.
In 1202, Fibonacci popularized the use of Hindu-Arabic numerals in Europe.
The Golden Ratio is 1.618. It is also called Phi. It appears frequently in the natural world, architecture, fine art, and biology. For example, the ratio has been observed in the Parthenon, Leonardo da Vinci’s Mona Lisa, sunflowers, rose petals, mollusk shells, tree branches, human faces, ancient Greek vases and even the spiral galaxies of outer space.
How to Use Fibonacci Levels in the Financial Markets
Taking high and low points on a chart and marking the key Fibonacci ratios of 23.6%, 38.2%, and 61.8% horizontally to produce a grid depict Fibonacci retracement levels. These horizontal lines are used to identify possible price reversal points.
The trading chart reflects a trend. Obviously, the price cannot move constantly in one direction, there will be a correction sooner or later.
So, as soon as the trend weakens and a pair of candles forms in the opposite direction, it is time to use the Fibonacci level.
You will see a chart with levels: 0; 0.236; 0.382; 0.5; 0.681; 0.764 and 1. We recommend positioning the levels in accordance with the current trend as shown in the screenshot below:
Fibonacci retracements are often used as part of a trend strategy. In this scenario, traders observe a retracement and try to make low-risk entries in the direction of the initial trend using Fibonacci levels. Traders using this strategy anticipate that a price has a high probability of bouncing from the Fibonacci levels back in the direction of the initial trend.
You can move and stretch the scale by using a left-click on one of the white dots and dragging it to the desired location.
Let’s discuss the rules:
- During the uptrend, level 0 should be located at the beginning, and 1 – at the end.
- In the case of a downtrend, level 0 should be located at the end and 1 – at the beginning.
How to trade with Fibonacci levels?
The indicator is used to show the end of the correction and the reversal of the main trend. It makes sense to buy at the end of the rollback
As previously discussed the 1.618 is a key number in the Fibonacci. This forms the basis of the most popular Fibonacci extension level – the 161.8% level.
In an uptrend, traders will attempt to enter the ‘bounce’ at point B and then measure the last retracement from A to B, to find how far the trend could go before reaching point C – the 161.8% level.
In a downtrend, traders will attempt to enter the ‘correction’ at point B and then measure the last retracement from A to B, to find how far the trend could go before reaching point C – the 161.8% level.
Reversal traders may also use the 161.8% level to enter into counter-trend trades but this is more suited to advanced traders.
A rebound from this line in the direction of the trend indicates the end of the correction and the continuation of the current trend.
- Buy a Put Option
- Buy a Call Option
A breakdown of the level and the rollback indicate a likely reversal of the trend. In this case, you should refrain from buying the option.
Many traders prefer to use a breakdown of level 1 as a signal. After a rebound from 0.618, the movement continued in the current direction, and your transaction was closed before the price reached level 1, you should wait a bit. In case of breakdown, you can buy another option in the same direction.
So far, you have learnt that Fibonacci retracement levels are used to find support and resistance levels to enter a trade in the direction of the preceding trend. Fibonacci extension levels are used to calculate how far the trend could go before reversing and are used as exit levels.
The Pocket Option trading platform offers traders the ability to trade on multiple asset classes and provides a lot of helpful tools, timeframes and styles. To start using the full range of Fibonacci indicators and to follow through the live trading examples in the next few sections, you can use a free demo account.
