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moo AAccccoouunntt
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L e a r n H o w t o U s e F i b o n a c c i i n F i n a n c i a l Tr a d i n g
HHOOM
MEE // AARRTTIICCLLEE // TTRRAADDIINNGG BBAASSIICCSS

BByy AAiisshhaa AAm

maajjiiddaa
 Jun 30 2022     

Anyone can use Fibonacci in �nancial trading as long as you know how to draw Fibonacci Retracement and learn how to trade with it.

Fibonacci is a series of numbers that are often used in various �elds, including trading in �nancial markets (forex, stocks, cryptos, and so
on). Where did Fibonacci come from and how do you use Fibonacci analysis in �nancial trading? This article will help you learn how to use
Fibonacci, starting from drawing the lines up to identifying buy/sell signals.

The Origin of Fibonacci 

The Fibonacci series of numbers was described by Leonardo Pisano (1175-1250), an Italian mathematician, in his book "Liber Abaci" or
Book of Calculation. The French historian, Guillaume Libri, nicknamed him "Fibonacci" - short for "�lius Bonacci" ("son of Bonacci") -
because his father's name was Guglielmo Bonacci. This name later became so well-known that people called him Leonardo Fibonacci, and
that is also the reason why "Fibonacci" is used as the title for the numbers he describes.

The Fibonacci numbers themselves were not actually discovered by Leonardo "Fibonacci" Pisano, but have long been discussed by Indian
mathematicians, especially in connection with the Sanskrit prose system. However, LLeeoonnaarrddoo w
waass tthhee ��rrsstt ttoo iinnttrroodduuccee tthhiiss sseerriieess ooff
mbbeerrss iinn tthhee bbooookk ""LLiibbeerr AAbbaaccii"" ttoo tthhee W
nnuum Weesstteerrnn w
woorrlldd; along with the arithmetic systems we know today, such as the concepts of
blanks, commas, decimals, and fractions.

Fibonacci Numbers and the Concept of Golden Ratio

In "Liber Abaci", Leonardo Pisano describes aa sseerriieess ooff nnuummbbeerrss w
whheerree eeaacchh nnuum
mbbeerr aafftteerr 00 aanndd 11 iiss tthhee ssuum
m ooff tthhee ttw
woo pprreevviioouuss
nnuum
mbbeerrss. So, the series consists of: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, and so on to in�nity. In the Fibonacci number
series, each number is approximately 1,618 times larger than the previous number.

In mathematics, tthhee nnuum

mbbeerr 11..661188 iiss aallssoo ccaalllleedd PPhhii,, oorr tthhee G
Goollddeenn RRaattiioo;; w
whhiillee tthhee ooppppoossiittee iiss 00..661188. The Golden Ratio is said to
appear mysteriously in the structure of natural phenomena, architectural and artistic masterpieces, as well as in the biological sciences.
Among them are Leonardo Da Vinci's Mona Lisa painting, Katsushika Hokusai's The Great Wave O� Kanagawa, the Parthenon (Greece)
temple, sun�owers, snail shells, human faces, and even the circle of galaxies in outer space. Many artists consider the Golden Ratio to
represent a certain harmony that causes something to be seen as beautiful.

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In �nancial trading, we don't use Fibonacci numbers as it is but based on the distance between the numbers in the series. For example,
dividing 89 in the Fibonacci sequence by the following 144 will result in 0.6180 (61.8%). Furthermore, if the number 89 is divided by the
second number after it in the Fibonacci sequence, it will come out as 0.3819 (38.2%), and so on.

Based on these rules, we acquire Fibonacci Retracement levels and Fibonacci Extension levels which can surprisingly explain price
movements when applied to the price chart. Therefore, Fibonacci is also used in forex trading as a technical analysis tool.

SSeeee AAllssoo::  44 TTrraaddiinngg TToooollss tthhaatt RReeaallllyy M

Maatttteerr FFoorr B
Beeggiinnnneerrss

F i b o n a c c i i n F i n a n c i a l Tr a d i n g
Financial traders and investors mainly apply Fibonacci Retracement and Extension. There are also variations such as Fibonacci Expansion,
Fibonacci Fan, and so on, but beginners should �rst understand how to use Fibonacci Retracement.

The Fibonacci Retracement and Extension consist of lleevveellss ccaallccuullaatteedd ffrroom m tthhee ddiissttaannccee bbeettw
weeeenn tthhee nnuum
mbbeerrss iinn tthhee pprreevviioouussllyy
ddeessccrriibbeedd sseerriieess,, pplluuss 5500..00%
% ((00..550000)). Although 0.500 is not based on Fibonacci numbers, this level is considered a phase with fairly
high potential for price reversal in Dow Theory and the works of renowned technical expert WD Gann.

Look at the chart below. Keep in mind how price reversals and Fibonacci Retracement levels line up. It may be di�cult to explain
scienti�cally, but it is real. Because of that, a lot of people employ Fibonacci analysis to trade forex, cryptos, and stocks.

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H o w t o D ra w F i b o n a c c i R e t ra c e m e n t ?
To draw Fibonacci Retracement, w
wee hhaavvee ttoo m
maarrkk tthhee hhiigghheesstt pprriiccee ppooiinntt ((H
Hiigghh)) oorr tthhee lloow
weesstt pprriiccee ((LLoow
w)) oonn tthhee cchhaarrtt within a
certain time period. It seems easy, but it is actually highly dependent on your sensitivity and trading setup. For example, in the price chart
below, you can see several highs and lows at a glance. But, where are we going to draw Fibonacci Retracement?

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To draw Fibonacci Retracement, we can lliim

miitt iitt ttoo tthhee lleennggtthh ooff tthhee llaasstt ffeew
w ccaannddlleess. For example, the last 60 candles are marked with
a gold vertical line in the chart. Thus, we only need to take into account the highs and lows of the last 60 candles on the rightmost side of
the chart.

Then look for a tool in your trading platform that can draw Fibonacci Retracement. It can usually be found on the menu bar. If you use the
M
Meettaattrraaddeerr ppllaattffoorrm
m, you can �nd it on the Insert menu >>> Indicators >>> Fibonacci >>> Retracements. Drag your cursor from left to
right. Click on the High or Low on the left side of the chart, then click on the High or Low on the right side of the chart. 

Please take note: tthhee ccoorrrreecctt ppaatthh ttoo ddrraaw

w FFiibboonnaaccccii RReettrraacceem
meenntt iiss ffrroom
m lleefftt ttoo rriigghhtt; so the retracement direction can be either
from top to bottom (Downtrend) or from bottom to top (Uptrend). Here is the result:

U
USSD
D//CCAAD
DDDaaiillyy cchhaarrtt w
wiitthh FFiibboonnaaccccii RReettrraacceem
meenntt dduurriinngg aann uuppttrreenndd

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EEU
URR//U
USSD
DDDaaiillyy cchhaarrtt w
wiitthh FFiibboonnaaccccii RReettrraacceem
meenntt dduurriinngg aa ddoow
wnnttrreenndd

H o w t o Tr a d e U s i n g F i b o n a c c i R e t r a c e m e n t s ?
Fibonacci Retracements can be used to identify SSuuppppoorrtt aanndd RReessiissttaannccee lleevveellss. We can also combine it with technical indicators to spot
trading opportunities and determine entry/exit levels. One simple and popular strategy combines Fibonacci Retracements with a trend-
based trading strategy. Here are the details:

1. Identify where prices move. For example in the picture below, it seems that prices are going down (bearish). In this situation, traders
will look for opportunities to sell when prices temporarily retrace higher.
2. Mark the horizontal lines where Fibonacci Retracement 23.6% (0.236), 38.2% (0.382), and 61.8% (0.618) are located. These lines are
used to identify levels where prices are more likely to reverse.
3. Observe close prices on the candle that represents price movements near the aforementioned Retracement levels. When prices
have risen up to Fibonacci levels of 0.236, 0.382, or 0.618, take note of where the next candle closes. 

If there is a candle that closes below a certain Fibonacci level; then prices may go down again, at least until the next Fibonacci
Retracement level. We can open short positions as long as there is con�rmation from other supporting technical indicators.

If there is a candle that closes above a certain Fibonacci level; it means prices will continue to rise. However, because the trend is
generally still bearish, it is not recommended to buy unless there are other technical indicators that signal a signi�cant trend reversal.

Fibonacci role in �nancial trading mainly marks important Support and Resistance levels. Therefore, although Fibonacci Retracement
levels can "magically" pin important moments in historical price charts, the actual use of Fibonacci must be complemented with technical
indicators (eg. M
Moovviinngg AAvveerraaggee) or candlestick patterns.

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AAiisshhaa AAm
maajjiiddaa

Aisha has been working with forex industry since 2008. Currently active as independent trader and educator
DDeem inccco�nancial
moo AAc ouunntt
GGuuiiddee

trading and investment.

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Forex is a high-risk trading instrument which is not suited for all traders and investors.
Before deciding to trade Forex or any other �nancial instrument, you should carefully consider your investment objectives, level of
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