How to Trade with Fibonacci Ratios: Quick Start Guide

It's easier than it looks, and you'll be amazed at how price action respects these levels when drawn properly!

How to Trade with Fibonacci Ratios By Richard Krugel | July 1st, 2020 Fibonacci ratios look great on any chart... But how do you actually leverage these numbers in your analysis? It may seem a little confusing at first, but don't sweat it: I'm going to show you two ways to work Fibonacci ratios into your trading routine, with a few examples from my own analysis along the way... Leonardo of Pisa (also known as Fibonacci) was an Italian mathematician, and the first to write about the special sequence of numbers that we know as Fibonacci ratios.​ When these numbers are added up in a certain way, they result in a ratio that can be used to describe the special proportions or building blocks that exist within nature. The most popular ratio is 1.618 (or the inverse which is 0.618). Mathematicians and scientists refer to this number as the golden ratio. As in nature, Fibonacci ratios work very well in the world of trading when performing technical analysis. They're a very reliable indication of future support and resistance levels; price action almost magically gravitates towards them and reacts to them. There are two main ways of performing technical analysis with Fibonacci ratios: Fibonacci retracements and Fibonacci extensions. How to Use Fibonacci Ratios in Technical Analysis   1. Fibonacci Retracements The most commonly used retracement ratios are:   0.382 % 0.5 % 0.618 % 0.786 % Let's see an example of how Fibonacci retracement levels can be used in an upward trending market: Using retracements is a great way to determine where a pullback or correction that is moving opposite the main trend will end. The Gold chart above illustrates most of the upward trend that this commodity experienced in 2016. To use Fibonacci retracements, connect a low on a chart with a high that materialized after that low (in an uptrend), and try to determine where that pullback may find support again. I marked most of the corrections with red arrows, and a closer look reveals how well each correction found support and reversed back up from a Fibonacci retracement ratio. 2. Fibonacci Extensions The most commonly used extension ratios are:   100 % 138.2 % 161.8 % 178.6 % 200 % The following example shows how Fibonacci extension levels can be used in a downward trending market: On the chart above, you'll see that Gold experienced a downward trending phase that ended around December 2016. Fibonacci extension ratios work well when determining where a trend may find support (in our example), but are also useful when determining whether a correction will follow or the trend will end entirely after that support. Analysts or traders that use Fibonacci extensions will connect 3 points on a chart: In our example, a high will be connected with a low, and then with a lower high again. The Fibonacci extension drawing tool will then project expanded ratios downwards; these levels will be closely watched for support or change in trend. You'll also notice that I drew two sets of Fibonacci extensions, so don't be afraid to try setting up multiple extensions on a long term chart. The first is indicated by little black arrows, and the second with little red arrows. The green arrows show how well these Fib extension ratios offered support as soon as price reached them.   Conclusion Using Fibonacci ratios to find areas of support or resistance can provide us with many trade-able opportunities... Especially when used in combination with additional methods that follow a systematic approach. Over the years I've found that using a combination of diverse but proven methods works better than relying on any single method. In my strategy, I utilize a combination of the following:   Multi timeframe analysis (This is where I use Fibonacci) Corrective pattern recognition Market geometry Momentum divergence Reversal candlestick patterns This methodology was developed to determine the main trend, and to join that trend at the end of corrections with as little risk as possible. I packaged the whole strategy into my Exponential Profits course, so feel free to check it out some time. (It's my whole bag of trading tricks.) Thanks for following along, now give these ratios a shot on your charts! Get Your Volatility Strategy Now

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