Fibonacci retracements levels are very useful in knowing the support and resistance for any stock or index, it is plotted horizontally on the chart which result in showing certain levels in percentage. These levels act as a support during downtrend and resistance during an uptrend.
Based on this levels, as a trader or investor you can make positions. Traders and investors across globe uses fibonacci as a technical analysis tool to build their positions.
In this post we will be understanding:
What is Fibonacci Number?
What is Fibonacci Sequence?
What is Fibonacci Series?
What is Fibonacci ratio/Golden ratio/Golden mean?
The fibonacci sequence in nature
What is Fibonacci Retracements levels?
How to use the Fibonacci in trading and investing? and lot more.
You can use the table of contents below to read your favorite part as explaining all in detail makes the post little long.
The origins of the Fibonacci series dated back to 200 BC can be found in the ancient Indian mathematical scripts. However, lately Leonardo Pisano, an Italian mathematician from Pisa, known to his friends as Fibonacci discovered Fibonacci numbers. “Fibonacci” was his nickname, which roughly means “Son of Bonacci”.
Around 1200 BC, mathematician Leonardo Fibonacci discovered the unique properties of the Fibonacci sequence.
Fibonacci popularized the Hindu–Arabic numeral system( (like our present numbers 0, 1, 2, 3, 4, 5, 6, 7, 8, 9) through Europe in place of Roman Numerals (I, II, III, IV, V, etc.) primarily through his composition in 1202 of Liber Abaci(Book of Calculation).
What is Fibonacci Number?
The Fibonacci Sequence is the series of numbers:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610…….
The next number is found by adding up the two numbers before it for example:
- the 2 is found by adding the two numbers before it (1+1),
- the 5 is found by adding the two numbers before it (2+3),
- the 13 is (5+8), so on and so forth
Observe the following pattern:
1+2=3, 89+144=233, 987= 610+377, 34= 21+13
What is Fibonacci ratio?
When you divide any number in the Fibonacci series by the previous number the ratio is always approximately 1.618. This is also know as PHI “φ“.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393,…….
377/233=1.618 , 55/34=1.618 , 144/89=1.618
Golden Ratio is also equal to 2 × sin(54°)
What is Fibonacci ratio/Golden ratio/Golden mean?
1.618 is what we call as Fibonacci ratio it is also known as the Golden Ratio. Golden ratio are also known by by few other names such as Golden mean, the Golden section, divine proportion, etc.
Likewise, when a number in the Fibonacci series is divided by its next succeeding number you will always get the ratios in same percentage. Check this below
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181,….
1597/2584 = 0.618
233/377 = 0.618
377/610 = 0.618 , 0.618,
Keep in mind, when you convert it in percentage it’s 61.8%.
Similar continuation can be seen when any number in the Fibonacci series is divided by a number two places higher.
89/233 = 0.382
233/610 = 0.382
377/987 = 0.382 ,
0.382 , when you convert it in percentage it’s 38.2%
In the same fashion in the Fibonacci series when a no. is divided by a number 3 place higher.
For example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610,……
13/55 = 0.236
21/89 = 0.236
144/610 = 0.236 ,
0.236 calculating in percentage terms it is 23.6%.
Don’t you think it’s really amazing, if you don’t read below to change your mind.
The Fibonacci sequence in nature:
Fibonacci numbers are found throughout nature, in human, in behavior, and therefore many traders believe that these numbers also have relevance in the financial markets. Look at the image below of a beautiful sunflower.
Sunflowers, which have opposing spirals of seeds, have a 1.618 ratio between the diameters of each rotation
Many buildings and artworks have the Golden Ratio in them, Parthenon in Greece, is one of the example.
There are more example of Fibonacci sequence in nature as an illustration check few facts below :
- If you divide the female bees by the male bees in any given hive, you will get 1.618..
- Try measuring from your shoulder to your fingertips, and then divide this number by the length from your elbow to your fingertips.
- Try measuring from your head to your feet, and divide that by the length from your belly button to your feet.
- Flower petals, Seed heads, Pinecones, Tree branches, Fingers, Animal bodies, DNA molecules etc.
If you are still not convinced you can know more about the golden ratio by searching google. Let us now move back to stock market and the implication of Fibonacci retracements levels.
What is Fibonacci Retracements levels?
The Fibonacci retracements levels are 23.6%, 38.2%, 61.8% one can consider 50% as also as important level. As we already know how you arrived to this number from above discussion, let us know how this can help in trading and investing.
You might have observed, whenever a stock moves either upwards or downwards sharply, it generally tends to retrace back before its next big move.
For example – you might have seen a stock does go for a rally up from Rs.100 to Rs.150, then it is likely to retrace back to probably Rs.125, before it can move Rs.180. The percentage 23.6%, 38.2%, 61.8% shows it’s level of retracement.
Once you find Fibonacci levels you can consider that point to be a support in downward rally or a resistance in upward rally and make your position in market accordingly. That sounds like a rhyme?.
Not only this you can use this in combination with other tools and indicators to be better positioned. Let us see how does Fibonacci retracements levels appears on a chart.
How To place Fibonacci Retracements Levels on chart?
Fibonacci technical tool will be easily available with the trading platform you use provided by your broker. Fibonacci retracements plotted on chart using horizontal lines.
You first need to identify the 100% Fibonacci move for that select the tool and find the pick the most recent highest level(peak) and lowest level(trough) on the chart.(for intraday or short term)
Incase you are looking for the long term investment use long term chart like a year,2, 5 and draw the line from the lowest to the highest. Look at the SBI Bank 1 day Chart below:
You have to click on lowest candle on chart, and without un-clicking drag the line till the peak point. The Fibonacci retracements levels starts getting plotted on the chart.
After you finish selecting both the low and the peak Fibonacci retracements levels are drawn.
As you can see the price of the stock retraced back to 61.8% level before an up move, this can be the place to enter and build a long position. These are levels are acting as a great support for the stock.
Above example was for uptrend rally and we have to select the lowest candle first and than the highest.
Now let us see what happens for a downward rally, in this case we will select the top candle first (100%), than the lowest candle.
In Above ICICI BANK 1 day chart you can see after a sharp downward rally, the stock tried to bounce back or make a reversal, however it was stopped twice at 38.2% fibonacci levels, which is also acting as a resistance for the stock.
One can make a short position at this levels to take benefit. A better trader or investor is “who knows when to enter and exit” from your position, and this where fibonacci retracements levels helps.
However, using the fibonacci levels alone may keep you at risk, to be better than other we have to be as much sure as we can before making any position in market. That is why it is always advisable to not use any technical indicator alone, use it with different combination. Let us combine fibonacci with other technical analysis tools.
Fibonacci Retracements With Support and Resistance:
Before we understand how to use fibonacci retracements levels with support and resistance levels, if you are not aware about the support, resistance and pivot points you can check this guide.
In brief, support means to hold up something, so that it does not fall further. In the world of trading and investing support is a tool to find a point or a level on a chart that prevents the price of a stock/index from falling further.
You will find most of the buying activities here. Support is the level at which the demand is powerful enough to stop the stock/index from falling any further.
Resistance is just opposite of support. As the word itself says to resist or stop something. Resistance level on a chart depicts a level where the rising price of a stock/index will be halted.
The reason for any stock to move downward from it resistance level is due to heavy sell-off at rising price.
I hope you now somehow have a basic understanding of S&R levels. Let us see how does both fibonacci and SR levels useful on chart.
Above is 1 hour chart of AXIS BANK, as you can see i have drawn the fibonacci levels from down to top during an upward rally to find the position to make an entry.
The stock after a sharp move retraced back to 38.2% which is nearby the the 1st resistance, which is now became the support (resistance becomes support when the stock moves beyond those levels).
After few hours of struggle it again moved up sharply , look at the below chart:
From near about Rs.380 to Rs.430, as an intraday trader one could have gone long and minted some quick money. Always keep the stop-loss nearby support or resistance it may get break sometime but any which ways you have to keep it at certain point.
Let us see another chart, but this time for a downward rally. Below is IRCTC 1 Hour chart:
As you can see in the above IRCTC chart, the stock fall sharply and tried to bounce back but at the 38.2% fibonacci levels there was a strong resistance zone.
Moreover the SR Levels shows the strong resistance is at Rs.1380 as well , one could have kept this as a stop-loss and did the shorting to gain few bucks within couple of hours.
Not only for stocks you can apply fibonacci retracements levels for index as well like nifty, bank nifty etc.
As said one can make an entry or exit the position after knowing these levels, fibonacci are quite useful for both the investor and traders whether short or long term, it is just how you use them.
Trade in smaller quantity if you are a beginner, experience what exactly happens to these levels. Always put a stop-loss below some point support or above some point resistance.
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