What Is the Fibonacci Trading Strategy?
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3 Simple Fibonacci Trading Strategies [Infographic] More than any other indicator, people place Fibonacci on a pedestal in my opinion. At times it feels like traders give Fibonacci an almost mystical power. At the end of the day, Fibonacci is nothing more than simple retracement levels. These levels are the only representative of where a security could have a price reaction, but nothing is etched in stone. What is the Fibonacci trading strategy? In the stock market, the Fibonacci trading strategy traces trends in stocks. When a stock is trending in one direction, some believe that there will be a pullback, or decline in prices. Fibonacci traders contend a pullback will happen at the Fibonacci retracement levels of 23.6%, 38.2%, 61.8%, or 76.4%. As mentioned below, a pullback is also possible to traders at 50%. For instance, if GE (NYSE:GE) is selling at $20 and rises to 21, the pullback will be 23, 38, 50, 61, or 76 cents. Some day trading experts see these Fibonacci numbers as a short-sell strategy. For instance, if GE stock is at $21 and falls to $20.62, some Fibonacci traders may see the 38 cent drop as a good sign to short the stock. For some traders, the Fibonacci retracement is a valid trading strategy to trade stocks. However, Fibonacci numbers aren’t always the best indicators of a trend. What do economic experts say about Fibonacci trading? Chris Svorcik is a forex trader who often uses Fibonacci trading. He says that traders can use the Fib method, but says that they need more experience to master Fibonacci trading. “I am a huge fan of EW[Elliott Wave, another trading strategy] and Fibs, but it does require some experience to handle it. Using moving averages does in my view shorten the learning curve. Also using price swings or EW as a support tool rather than a main trading tool, I think, makes it less complicated, ” said Svorcik. Daniel Leboe, an analyst with Zach’s, also likes using the Fibonacci retracement. However, he also advises caution to traders when using the trading strategy. “Fibonacci retracement is a good tool to use when deciding if now is a good time to buy, but do not look at it as the holy grail. In this volatile market, we are prone to blow through levels. Make sure you have a shopping list of stocks you like ready so that you can pull the trigger when the time comes,” said Leboe. “We are in what I think is one of the best buying opportunities of our lifetimes. We need to make sure that we play it right – buy when the market breaks and average down with small orders,” added Leboe. “Fibonacci queen” says traders should have a plan with trading strategy Experienced trader Carolun Boroden trades so often with the Fibonacci strategy that she’s been dubbed the “Fibonacci Queen.” She says that even if traders follow the Fibonacci strategy, they should still have a specific trading plan. “You [need] a specific plan that describes what your trade setups are; how you’re going to get into the trades; what you are going to risk; how you’re going to manage the trade and take profits; how you’re going to have certain targets, or you’re going to trail a stop,” said Boroden. Does the Fibonacci trading strategy predict stock market trends? While some financial experts are skeptical of the Fibonacci strategy, it has predicted other downturns before. In February before the COVID-19 crisis, the Dow Jones retraced about 50% before the economic crash. Andrew Adams is a technical analyst at Saut Strategy. He wrote in a research note that the pullback at that ratio meant an end to the previous bull market. “Rallies of all sizes do regularly eventually pull back at least to the 38.2%-50% Fibonacci levels,” wrote Adams. Not long after that retracement, the bear market devastated the stock market. While the strategy has predicted a bearish market, it can also predict a bullish market as well. According to CNBC’s Jim Cramer, Boroden’s Fibonacci strategy predicted a stock market recovery in May. “The charts, as interpreted by Carolyn Boroden, suggest that the major averages are still in rally mode, but it’s a precarious rally where you need to proceed with caution if we fail to break out from these levels and slip back to where we were not that long ago,” said Cramer. “She thinks the S&P is a buy right here. There’s too much going right in her charts for her to say anything else. However, she says you should be ready to sell if we fail to break out over the 200-day moving average, eventually,” added Cramer. While the Fibonacci trading strategy isn’t exact, if used correctly, it can predict major stock market trends. The different Fibonacci trending strategies will be explored in this article. Fibonacci Trading Personas Before we go into the gritty details about Fibonacci trading strategies, check out three Fibonacci trading personas and their strategies. While fictitious, they do an awesome job of summarizing common trading practices. If you would like to read about the technicals of Fibonacci trading feel free to skip down to our table of contents below. But if I can entertain you for just one second, I think it’s important to think through which persona best fitsyour trading style. Which Persona Best Describes You I want you to ask yourself the question of how you plan on leveraging Fibonacci in your trading regimen? If you haven’t done so already, think about writing a trading plan for you to review before, during and after the market closes. I can fluctuate between the low and high volatility Fibonacci trader depending on what the market is offering. However, as of summer 2018, I find myself gravitating towards the low volatility persona. For me, I like to monitor my trade setup and add to positions as they go in my favor. Fibonacci assists me in seeing these hidden levels of support and resistance to help me determine my entry and exit targets. Chapter 1: Origin of the Fibonacci Sequence Does this numbering scheme mean anything to you – 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377? Not really, right? Well, you are in the right place if it doesn’t. These numbers are the root of one of the most important techniques for identifying psychological levels in life and in trading. Behold the mighty Fibonacci ratios! Hundreds of years ago, an Italian mathematician named Fibonacci described a very important correlation between numbers and nature. He introduced a number sequence starting with two numbers – 0 and 1. Have a look below, as we build a Fibonacci sequence [1]. Again, we start with 0 and 1. 0, 1 The sequence requires you to add the last two numbers to get the next number in the sequence. Following this logic, we get the following equation: 0 + 1 = 1 Now we have our third number in the sequence – 1. See below for the updated sequence. 0, 1, 1 Now we add the last number in the sequence to the previous number once again: 1 + 1 = 2 We again update our sequence with the number 2. 0, 1, 1, 2 and then… 1 + 2 = 3 and then… 0, 1, 1, 2, 3 and then…. 0, 1, 1, 2, 3, 5 and then…. 0, 1, 1, 2, 3, 5, 8 and then…. 0, 1, 1, 2, 3, 5, 8, 13 This process goes on to infinity. Chapter 2: Key Fibonacci Ratios Fibonacci discovered every number in the sequence is approximately 61.8% of the next number in the sequence. 55 / 89 = 0.6179775280898876 = 61.8% 233 / 377 = 0.6180371352785146 = 61.8% 144 / 233 = 0.6180257510729614 = 61.8% This is not the only correlation. Fibonacci also uncovered that every number in the sequence is approximately 38.2% of the Fibonacci number two steps ahead. (13, 21, 34) 13 / 34 = 0.3823529411764706 = 38.2% (21, 34, 55) 21 / 55 = 0.3818181818181818 = 38.2% (55, 89, 144) 55 / 144 = 0.3819444444444444 = 38.2% (144, 233, 377) 144 / 377 = 0.3819628647214854 = 38.2% Also, we have another ratio! Every number in the Fibonacci sequence is 23.6% of the number after the next two numbers in the sequence: (55, 89, 144, 233) 55 / 233 = 0.2360515021459227 = 23.6% Chapter 3: Fibonacci Ratios Everywhere Fibonacci Sea Shell The volume of each part of the shell matches exactly the Fibonacci numbers sequence. Thus, each part of this shell is 61.8% of the next. It works the same way with this aloe flower: Aloe Flower If we separate the aloe flower into even particles, following the natural curve of the flower, we will get the same 61.8% result. This ratio is not only found in animals and flowers. This ratio is literally everywhere around us. It is in the whirlpool in the sink, in the tornados when looked at through satellite in space or in a water spiral. The Fibonacci ratio is constantly right in front of us and we are subliminally used to it. Thus, the human eye considers objects based on the Fibonacci ratio as beautiful and attractive. Also, big corporations like Apple and Toyota have built their logos based on the Fibonacci ratio. After all, these are two of the most attractive and engaging logos in the world. Still not a believer, check out this study from Harvard’s math department where they cite a study from Dr.