Fibonacci money Trading method using Fibonacci Ratios in making the entry and exit decisions in your trading. Fibonacci Ratios are also known as Fib Levels. Fib levels are 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. The three most important fib levels are the 32.8%, 50% and 61.8%. It has been found that the market tends to react with a high degree of probability at these levels.
Fibonacci ratios are based on the famous Fibonacci ordern that is obtained by adding the two past numbers to find the new number. The ordern starts from 0. The first two numbers are 0,1. The following numbers are obtained by adding the past two numbers to get the next number as said before.
So, the ordern develops like this 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…
This ordern was discovered by an Italian mathematician in the 13th century. The most important thing about this ordern is that if you divide a number by the next number you will get 61.8%. In the same manner if you divide a number by the number two places ahead you will get 38.2%.
These ratios are also known as the golden ratios and it has been found that these ratios have important applications in character. As far as the markets are considered, whenever a new move starts, it has been observed that the money pairs or the stocks tend to make a pullback or reverse a percentage of the past move.
This is the basis of Fibonacci money Trading. When a new move starts, we divide the past move into 6 horizontal levels of 0%, 23.6%, 38.2%, 50%, 68.2% and 100%.
If the market moves from swing high to low and then turns up, first calculate the swing range by subtracting the high point from the low point in the swing. Then apply these ratios of 0, 0.236, 0.382,.5, 0.682 and 1 to the range and then subtract that number from the swing point high. That’s it you have got the fib levels. In the same manner, you can calculate these Fib Levels fro swing low to high.
However, you don’t have to worry much. Most charting software will calculate the Fib Levels automatically for you. Once the price action reaches close to these levels look for confirmation using candlestick patterns or other indicators for a possible retracement. This is how we use Fibonacci Ratios in money trading.