How to use Fibonacci levels in trading? Detailed analysis

28, Mar - BLOG

Fibonacci levels are one of the most popular tools in trading. They help to identify possible price reversal points and support and resistance zones. They are based on the sequence of numbers discovered by mathematician Leonardo Fibonacci. In this sequence, each number is the sum of two previous numbers. If you take the ratios between the numbers of this sequence, you will get the so-called Fibonacci ratios. In trading, 23.6%, 38.2%, 50%, 61.8% and 100% are considered the most important.

How Fibonacci levels work

The use of Fibonacci levels is based on the idea that after a strong price movement there is a pullback. Traders use these levels to determine where this pullback may end and the price will continue to move in the direction of the main trend. For example, if the price of an asset has risen sharply, it may partially decline before continuing to rise. Fibonacci levels help to identify possible end points of a pullback.

Building Fibonacci levels

To build Fibonacci levels in the trading terminal, you need to select a significant price movement. First, the minimum and maximum of the trend movement are determined. Then Fibonacci levels are built on this range. The main idea is that the price is highly likely to react to these levels. If the price reaches the 38.2% level and starts to bounce upwards, it can be a signal to enter a buy trade.

Basic Fibonacci levels and their limitations

Most often traders use the 38.2%, 50% and 61.8% levels. If the price breaks through the 61.8% level, it may indicate a possible trend reversal. Some traders also consider the 23.6% level as a shallow pullback point, and the 100% level as the end of a complete move. It is important to remember that Fibonacci levels do not provide a hundred percent guarantee of a reversal or continuation of a move. It is just one of the analysis tools that helps to find potential entry and exit points. Therefore, they should always be used in combination with other methods.

Combining Fibonacci levels with other tools

Fibonacci levels work well in combination with other analysis tools. For example, traders often use candlestick patterns at Fibonacci levels to confirm signals. If the price approaches the 61.8% level and a reversal candlestick pattern is formed, this can be an additional confirmation to enter the market. Fibonacci levels also work well with trend lines and indicators such as RSI and MACD.

Fibonacci Extensions

Some traders also apply Fibonacci extensions to identify potential price movement targets. If price breaks the previous high or low, Fibonacci extensions help predict where price may go next. The major extension levels are 127.2%, 161.8%, 261.8% and 423.6%. In trading, it is important not only to build Fibonacci levels correctly, but also to take into account the market context. For example, if several factors coincide at the 61.8% level, such as a bid or ask zone and a strong support or resistance level, the probability of a successful reversal increases.

Practice and risk management

It is recommended that beginners first test Fibonacci levels on a demo account. This will help to understand how the price reacts to these levels and how they can be used in your trading strategy. It is also worth studying chart history to see how Fibonacci levels have worked in the past. Another important consideration is risk management. Even if a Fibonacci level indicates a possible reversal, you should always place a stop loss. This will protect your deposit from unexpected market movements. Usually stop-loss is placed just below or above the Fibonacci level, on which the trader is oriented.

Practice shows that Fibonacci levels work best in trending markets. If the market is in flat, their effectiveness decreases. Therefore, before using this tool, it is important to determine the current state of the market.

Conclusion

Thus, Fibonacci levels are a powerful tool that helps traders find potential entry and exit points for trades. They are based on mathematical patterns and are widely used in technical analysis. However, like any other tool, they should be used in combination with other methods and take into account the market context. With experience, traders learn to see how Fibonacci levels interact with price and use them to more accurately predict market movements.