When a number in the Fibonacci series is devided by the number preceding it, the quotients themselves approach the Fibonacci constant ( also known as the Golden Ratio (1.618):

1/1=1, 2/1=2, 3/2=1.5, 5/3=1.666, 8/5=1.6, 13/8=1.625, 21/3=1.61538, 34/21=1.619, 55/34=1.6176…, and 89/55=1.618

The inverse process (e.g.55/89 instead of 89/55 also produces a constant: 0.618 or skipping a number in the sequence (e.g. 55/144 and 144/55 produces two more constants: .382 and 2.618. The ratios of the Fibonacci sequence can be represented through horizontal lines calculated between the start and end point of a measurement. These lines will be applied to an active price chart.

When you place these levels on to a chart as horizontal lines they show areas of support and resistance. And you now need to understand how to use it correctly. So, how are the Golden Ratio and other Fibonacci levels used in Fibonacci trading? Firstly, these ‘special’ numbers are split into Fibonacci retracement levels and Fibonacci extension levels which then provide values where possible turning points could take place in the market.

Fibonacci retracement levels: 0.236, 0.382, 0.500, 0.618, 0.764.

Fibonacci Expansion Levels: 0, 0.382, 0.618, 1,000, 1.382, 1.618.

As Fibonacci is very popular among traders, there are now many trading platforms that provide Fibonacci calculators, so you only need to calculate it. Let’s have a look at these in more detail.

Fibonacci retracement levels help to provide price levels of support and resistance where a reversal in direction could take place and can be used to establish entry levels. Fibonacci retracements can be used to identify the price at which to Place Orders, Take Profits, Enter into a Stop Loss.

When you are using this tool, you need first to identify the topmost and lowest points that you want to consider on your chart. In the immediately preceding section of this post, we described how the reference points of 0% and 100% were fixed. You’ll have to carry out a similar exercise when you are assigning reference points on your chart.

After you allot the reference points, you can divide the vertical distance between 0% and 100% into the Fibonacci ratios. Remember that these are 23.6%, 38.2%, 50%, and 61.8%.

These points can be used to identify support and resistance levels.

Let’s understand the method with a simple example:

How to use Fibonacci retracement in an uptrend

This illustration demonstrates how Fibonacci retracement can be used when prices are moving up. You can see that the price rises from A to B, and then the decline starts. C, D, and E are different points at which retracement could take place.

In the illustration shown above, C occurs at a level of 38.2% of the price rise from A to B. You can also see that D and E are at the Fibonacci retracement levels of 50% and 61.8%. So, you could take advantage of a rising market by buying at the level of C, D, or E.

Fibonacci retracements work in falling markets too.

How to use Fibonacci retracement in a downtrend

The chart reproduced above traces prices in a falling market. Prices go down from point A to point B. They then rise before falling again.

The increase in prices starts at B. But there’s resistance at the Fibonacci level. This resistance could take place at C. At this point, which is at 38.2% of AB, retracement starts. similarly, retracement could begin at D (Fibonacci level of 50%) or E (Fibonacci level of 61.8%).

Why does the price resume its downward trend at E, D, or C? The reason could be that a significant number of traders think that prices cannot rise above those levels. So, they place sell orders when the bounce back reaches one of the Fibonacci levels.

They work best when the market is trending. It’s also advisable to use a combination of Fibonacci levels with other lines. If you do this, you’re more likely to meet with success.

Drawing Fibonacci retracement levels is a simple three-step process:

In an uptrend:

• Step 1 – Identify the direction of the market: uptrend
• Step 2 – Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the top
• Step 3 – Monitor the three potential support levels: 0.236, 0.382 and 0.618

In a downtrend:

• Step 1 – Identify the direction of the market: downtrend
• Step 2 – Attach the Fibonacci retracement tool on the top and drag it to the right, all the way to the bottom
• Step 3 – Monitor the three potential resistance levels: 0.236, 0.382 and 0.618

Of course, it is more reliable to look for a confluence of signals (i.e. more reasons to take action on a position). Don’t fall into the trap of assuming that just because the price reached a Fibonacci level the market will automatically reverse.

Combine Fibonacci levels with Japanese Candlestick patterns, Oscillators and Indicators for a stronger signal. As you can see in the chart below, the “Three White Soldiers” pattern is confirmed by the fact that prices are trading above the Moving Average line, and additionally that the MACD (Moving Average/Convergence Divergence) is above the zero line.

Every trader, especially beginners, dreams of mastering the Fibonacci theory. A lot of traders use it to identify potential support and resistance levels on a price chart which suggests reversal is likely. Many enter the market just because the price has reached one of the Fibonacci ratios on the chart. That is not enough! It is better to look for more signals before entering the market, such as reversal Japanese Candlestick formations or Oscillators crossing the base line or even a Moving Average confirming your decision.

Fibonacci Expansion is the linear instrument of the technical analysis used to determine the third wave. It is very similar to such instrument as Fibonacci Retracements with the exception that expansion is built along two waves rather than along one trend line.

How to build Fibonacci Expansion

Fibonacci Expansion is built along three points, which describe two waves. To start with, we put the line of the first line (top – bottom, bottom – top) thereby uniting two points. Further the distance of the first wave will be taken as a singular cutting. Then from ending point of the second wave (point 2), we lay the second line to the ending of the second wave. This way we get three connected points, which serve as benchmarks for building invisible line over the distance equal to 61,8 %, 100 % and 161,8 %. Ending of 3 wave is expected on the level of 161,8 %. As per the law of Elliott Waves, that is the ideal ratio between the lngest momentum wave to the shortest wave. The people acquainted with wave theory remember that wave 3 quite often can take an extension form. It is accepted that when the third wave exceeds ideal “golden ratio” 1,618, it takes an extension form. Of course, this is not a tough rule, but such specifics should be taken into account. Also it is important to note that in terms of wave analysis and Fibo math methods, 50 level is not the key level in Fibo and it only validates the middle of the range.

How Do You Trade Fibonacci Expansion Levels?

The simple strategy is to use the highest high and lowest low and add Fib levels using MT4/MT5 platform:

If you pick Fibonaci levels retracements or Expansion levels you will get in both cases expansion levels. Expansion levels tool will give you only 2 most common levels for your target.

So your strategy can be for SELL TRADE :

Step 1: Pick low and high on the chart.
Step 2: If you see that the price on hourly close is below 61.8% Fibonacci retracement than make SELL trade.
Step 3: Put stop loss on High Price.
Step 4: Set your target to be either 161.8% expansion level or 200% expansion level or 268.1% expansion level.

Or you can cut a small number of lots on each target and move stop loss whatever you like.

See this strategy for sell trade on the image below:

Fibonacci expansion is supplementary in the deal of determining the third wave. Expansion levels prove their use as the lines of resistance and support. Basing themselves on the wave principle (small waves create larger wave models), many wave traders apply Fibonacci expansion to determine the end of the 5^th wave or end C correction wave.

While extensions show where the price will go following a retracement, Fibonacci retracement levels indicate how deep a retracement could be. In other words, Fibonacci retracements measure the pullbacks within a trend, while Fibonacci extensions measure the impulse waves in the direction of the trend.

Still Facing Trouble By Using Fibonacci

Although Fibonacci is already popular and often used by traders as a tool, but in practice, there are still many who use it wrong. What are the mistakes of traders in using Fibonacci?

Not Recommended to Use a Join Reference Point

Retracement is a correction of an ongoing trend. In Fibonacci theory, at the same retracement level as the ratio figure is the support/resistance level used to enter or exit a reference. This retracement level is determined by various types of reference points. The highest reference point is known as the high swing, while the lowest level point is known as the low swing. The reference points for both swing highs and low lows can be determined through candlestick closing prices/extreme (high or lowest) candlestick prices.

If a trader uses the closing price as a reference for a high swing in the body of the candlestick, the low swing reference point must be right at the closing price. The same thing if there are traders who use extreme points when the high swing is at the highest point of the candlestick bar, the low swing must also be at the lowest point of the bar.

You must remember that relative support and resistance levels. But by setting a fixed reference point on the Fibonacci retracement, traders can get more accurate references about support and resistance. Or traders can try with a collection of reference points located at the closing price of the candlestick (body to body).

Do Not Collect Long Term Trends

Traders who use Fibonacci Retracement are strongly advised NOT to ignore trends and always check trends that occur within the current time frame or larger time frame. Unless you are accustomed to trading on a high time frame. This method is very important to do so that you can avoid mistakes in predicting long-term trends that can later lead to trading errors, so the edges will disappear again.

We Use and Make Additional Indicators as Confirmators

In order not to be mistaken in the position entry, traders can use additional indicators as confirmation for Fibonacci retracement levels. Examples of indicators that can be used are MACD, Stochastic, or RSI.

Do Not Use the Return of Fibonacci in a Small Timeframe

A small/low time frame usually appears noise or in other words signals that seem unreliable. Volatility is also quite large and Fibonacci retracement support levels that support the resulting resistance are VERY inaccurate. So later you cannot predict the price direction accurately and it will be very difficult to find the exit level because the pip movement is very small

So, What’s the Solution?

Although there are many forex trading techniques spread throughout the forex industry, Fibonacci is very “strong” and can really help users in providing accurate trading signals. It doesn’t feel like a trader if you don’t master Fibonacci retracement trading techniques, and for those of you who want to learn this technique.