Learning to use Fibonacci Levels, both retracements and extensions has been one of the greatest discoveries in my trading career. In the paragraphs that follow I hope to uncover a little bit of the mystery surrounding the Fibonacci indicator.
However, I should add that this will in no way be a scientific or mathematical discussion of Fibonacci numbers. I’ll be leaving that to someone smarter than myself, instead this will be my attempt at highlighting the power that can be harnessed through the use of these levels.
What are Fibonacci Levels and why should anyone care?
Well, in truth, I don’t know much about what Fib levels are. I’d suggest reading this article from mathisfun.com to understand the mathematics of the thing. What I do know is, Fibonacci levels are potential pivot points or support levels for an underlying price. To be clear take a look at the image below and notice how price behaves at the lines drawn. You’ll see these levels either reject or support the price of the asset.
Almost spooky how price behaves around these lines isn’t it? Price seems to use these lines like gravitational beacons of some sort both pushing off of or pulling in to one level or another. Its this “phenomena”, for lack of a better word, that allows traders to use this indicator with consistency.
As for why you should care, I think that answers itself but for those like me, its because it can help you make money. Fib levels can identify at what point a trader should get into and out of a market… and that is of incredible value!
How to draw Fibonacci retracements – Accurately!
Start with any chart you wish and determine the prevailing trend for whatever time frame is desired. The image above is a daily chart but Fib lines work for anytime frame, which adds to the value, but that’s a different discussion. If the trend is up the 0% line should be at the top of the most recent high price. Should the trend be to the downside, the 0% line should be at the most recent low price.
Now, simply look to see if price is at a support or resistance level. As options traders we can place trades that take advantage of small or even large moves higher or lower. Once we’ve identified these levels the only thing left to do is decide on an appropriate trade to place.
We’ll leave a pin in the trade discussion topic for later.
May God bless and keep your trading profitable,