What is Fibonacci?
Well, in order to answer this question and keep it simple, I'd say that "Fibonacci" is used in Trading as a tool to measure different price points or swings.
The word "Fibonacci" comes from his founder, Leonardo Pisano, known by his nickname"Fibonacci." Pisano was a famous European mathematician. One of his most popular work was the discovery of the Fibonacci sequences.
What is a Fibonacci Sequence
A sequence is simply a series of numbers in which each term is the sum of the 2 numbers preceding it. The first ratios are: (1,1,2,3,5,8,13,21,34,55,89,144... ). These numbers are recursive. There is also the Golden Ratios and those represents the measurement of any number to the succeeding higher number. For example 34:55 =.618 and 89:144=.618
Golden Ratio
The Golden Ratio is used in lots of different areas. It, for example, describes the proportion of everything from the nature. If you measure your height starting at your feet to your belly button, you will get 61,8% of your total height... Funny huh?
The ratios are also used in the Financial Markets because the market uses the same mathematical base. The most common used ratios are the 38,2%, 50% and the 61,8.
Fibonacci retracement
Lots of traders look at the Fibonacci retracement in order to find a potential trading entry. They rely on a tool and make decisions based on it. Some traders think that support or resistance can be created because of a Fibonacci level. As you must know from now, the Ace Gazette Army trades by the law of Supply & Demand. We do not believe that support and resistance is created from a Fibonacci level, therefore most of the traders here do not use the Fibonacci retracement as an entry signal,. Like I explained above, it is just a measurement tool not a magic entry producing machine. Fibonacci can be used when looking for confluence in trading. However, I will never make a trading decision based on a Fibonacci level, myself.
How to calculate the Fibonacci retracement?
I could make a very long article just talking about "how to calculate a Fibonacci retracement" manually but I honestly think that it is useless because most of the actual trading platform do have a Fibonacci Tool incorporated in their software. The tool will automatically calculate everything for you. You will only need to select the swing points that you would like to measure. The Fib Tool can be used on any chart and on any TimeFrame.
When Fibonacci Fails...
Do you remember when I said that Fibonacci was just a measurement tool? Well be aware that a Fibonacci level can fail, price will not always reverse at the Fibonacci golden ratio. This proves again to you that price reversal occurs because of the big orders that are left at the Supply & Demand levels and not because of a Fib Level.
Click on the link bellow to read the rest of the article and to see some example of what I explained above on a price chart.
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