Currently, Fibonacci number are known as the most magical sequence of numbers in nature and technology. Learning about the strange rules of this number sequence and its applications in many fields, from art to finance, you will find them extremely special. Read this Forex Trading article now to start your journey of discovery with us.
Fibonacci Numbers: Overview
Explore the magic of the Fibonacci number below for more information about the number sequences used in technical analysis. Why does it have such great attraction?
What is the Fibonacci sequence?
In the 12th century, the Fibonacci number sequence was born based on the mathematical theory of Leonardo Fibonacci. This is a popular number sequence used by investors. This sequence of numbers starts at 0.1 and has the number after it is the sum of the two numbers immediately before it. Specifically, this sequence of numbers has the form: 0, 1, 2, 3, 5, 8, 13, 21, 34,…
Through this series of numbers, many analysts have realized that dividing the numbers in this series by each other creates the following ratios: 23.6%, 38.2%, 61.8%, 161.8%. These ratios are considered prominent percentage levels in technical analysis and trading. There are 3 prominent and commonly used ratios: 23.6%, 38.2% and 61.8%.
Meaning of Fibonacci number
In the way prices move in the market, the Fibonacci number sequence plays an important role such as its existence through the Fibonacci formula it leaves behind. From there, important points in the price movement will be identified.
Fibonacci retracement is a popular tool that is widely used. Because of its convenience and ability to apply to many different types of assets. Specifically, with the Retracement ratio, investors can identify resistance-support levels, stop loss, and take profit points.
See more: Profession forex trade thanks to fibonacci applying
Fibonacci number types
Explore the variety of Fibonacci number forms. It ranges from the classic sequence to different variations and combination numbers. This opens the door to many interesting aspects and applications in many different fields. Below are some forms of the Fibonacci number sequence :
Fibonacci sequence: Retracement form
Fibonacci Sequence: Retracement is a very popular tool in technical analysis.
This type of retracement helps them build strategies in trading. At the same time, it supports choosing reasonable target prices or stopping losses based on resistance and support levels.
After significant volatility, new support and resistance levels will often appear at or near the key 23.6%, 38.2%, 50%, 61.8%, and 100% retracement lines.
Retracements are fixed price levels, unlike moving averages. This shows price levels allowing investors to quickly identify them. From there, make predictions and decisions when trading near important thresholds.
To use the retracement form, it is important to identify and connect the closest peak with the uptrend bottoms. Additionally, connect with the bottoms closest to the tops for a downtrend.
Fibonacci Sequence: Extended Time Form
One indicator that is often favored by technical traders is the Extended Time Pattern. This has helped identify key moments when prices may change suddenly or reverse trends.
This technical chart consists of a series of vertical lines corresponding to the numbers in the sequence (1, 2, 3, 5, 8, 13, 21, 34,…).
Within a specified trading time frame, from a market bottom (Lows) to a market peak (Highs). After reversing, the results of extended-time Fibonacci lines corresponding to the important thresholds 38.2%, 50%, 61.8%, and 100% will appear. From there, you can predict reversal points at the areas where the Fibonacci Time Extension lines intersect.
This format is effective for analyzing long-term price trends. Besides, they are valuable when studying short-term trends. The more reversal points an extended time chart contains, the more reliable it is.
Fibonacci sequence: Fan form
This is a type of technical chart with three diagonal lines. It relies on Fibonacci ratios to identify important support and resistance levels.
Fibonacci Fan is created by drawing a trend line through two points. One is from bottom to top (in the case of an uptrend). The second is from top to bottom (in the case of a downtrend).
Fibonacci numbers: Instructions for applying the 2-step model
In 2-step patterns, known as zigzag patterns, there is usually a correction phase of the previous market trend. To establish a price cluster you will need to look for overlapping Fibonacci price levels.
Identify price clusters on Fibonacci numbers
You need to identify price clusters to implement this 2-step model:
- From a – b: this is the Fibonacci retracement price level.
- Extension rate from c – d: this is the Fibonacci retracement price level.
- From b – c and projection to d: this is the projected Fibonacci price level.
From there, we will find the price cluster at point e. The accuracy rate increases the closer the Fibonacci levels overlap.
How to apply the Fibonacci 2-step model
Example: 2-step model on SHB chart
- Use Fibonacci retracement to determine from point a (short-term top) to point b (short-term bottom).
- Use Fibonacci projections to determine from point b to point c (which is the price peak) and project down to point d.
- Use Fibonacci retracement to determine from point c to point d.
From there, we see that the price cluster overlaps at point e with the levels: 0.618; first; 1,272. It is very difficult to make a profit at the expected price of 100%.
Application of Fibonacci numbers in technical analysis
In the financial market, if you know what is Fibonacci, it is easy to apply it in technical analysis. Making it a powerful tool. Thanks to the reviews and notes below, you will know how effective this application is.
Evaluate the flexibility of Fibonacci numbers
To ensure that the reasonableness of the Fibonacci ratio. It must be viewed in the context of the major trend and other support/resistance levels on the chart. From there, the proportional flexibility of the Fibonacci levels can be determined. The diversity of the Fibonacci sequence is an undeniably important point. Creating a wide range of applications and applications in many different fields is important. Sometimes, Fibonacci levels are not exactly consistent but can still provide useful information about potential buy and sell points.
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Things to keep in mind when using Fibonacci in technical analysis
This number series is very useful for investors when needing to identify support and resistance areas. However, traders should note that this number sequence also has certain disadvantages:
- Investors use it appropriately in analysis by combining other technical indicators. This index should not be used alone to make investment decisions. Because currently, the market has many other factors affecting it.
- Depending on the investor’s perspective, the correct bottom, top, and time frame can be determined. From there, you can draw the Fibonacci line most accurately. This is not simple, requiring investors to practice skills and gain more knowledge.
- Do not completely depend on this series of numbers in price analysis. Although important price thresholds can bring very high profits, investors must always be careful and carefully review decisions because this ratio is not always absolutely accurate.
- For the Harmonic model, there will be no available data on the Fibonacci number sequence, so you need to wait for the right time to take advantage of the opportunity.
Conclude
Thus, the article below shared by Forex Trading about Fibonacci number. Besides, there are some notes on using Fibonacci in technical analysis. Please follow the next article to learn more useful investment knowledge. Wishing you success in your investment activities!
FAQs
The identified risk that can appear in the Fibonacci sequence is?
Always identify trading risks based on Fibonacci levels and use stop-loss to protect invested capital. The Fibonacci indicator requires knowledge and experience to use effectively. Invest time to master how to use it before applying it to real trading.
Can Fibonacci be used with other tools?
The Fibonacci sequence is effective when used in conjunction with other technical analysis tools. Includes tools such as moving averages, trendlines, and momentum indicators. Combining them is a good solution and gives you a more comprehensive view of price trends.
Predicting Fibonacci’s potential price level?
The Fibonacci sequence and ratios are used to predict potential price corrections. These factors are likely to return during price moves.
