RELIABLE TRADE SETUPS USING THE FIBONACCI SEQUENCE
What is a Fibonacci sequence?
Fibonacci was an Italian mathematician who defined a set of numbers. The Fibonacci sequence is a series of numbers in which, after 0 and 1, every number is the sum of the two previous numbers. The sequence produces sums into eternity:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765….
There are some fascinating connections between these numbers that form the basis of Fibonacci sequence trading. While we cannot cover all of these links in the present post, below are the most important qualities of the sequence that you will need to know when we apply Fibonacci’s principles to Forex trading:
- If you divide a number in the sequence by the previous number, the quotient is approximately 1.618. This value is used as a key level in Fibonacci extensions as you will soon learn.
- If you divide a number by the next highest number, the quotient is approximately 0.618. This number forms the foundation for the 61.8% Fibonacci retracement level.
The setup of the Fibonacci sequence
As pictured in the diagram above, these are the numbers we focus on when Fibonacci sequence trading. We use the 31.8% and the 61.8%/78.6% as retracements, and the -27% and -61.8% as the extension levels or targets.
When to use the Fibonacci numbers
You should use the Fibonacci numbers when you have already identified the trend direction and key levels. Both Fibonacci retracement levels and Fibonacci extension levels are used by many traders with different trading styles and timeframes, such as long-term trading, intraday trading, and swing trading.
The tool and levels of the Fibonacci sequence are also used within many different trading markets, especially within Forex trading. The most effective time to use it, in our opinion, is when analysing the daily timeframe.
Use the Fibonacci sequence in both long-term bullish and bearish trends
The Fibonacci sequence is a basic tool. When combined with other Forex trading tools it is very powerful and accurate and can yield high profits. Combine Fibonacci strategy with:
- Key levels
- Moving averages
- Trend direction
Conclusion Fibonacci sequence
Hopefully, you feel more comfortable with the basics of the Fibonacci sequence and how it can be applied to Forex trading. Remember, it will work on all timeframes, but it is better to utilise the strategy on the four-hour charts, daily charts, weekly charts, or monthly charts. Yet, this does not mean you cannot apply Fibonacci quarterly.
The Fibonacci sequence is a useful tool to identify where the targets, destinations, and pullbacks are likely to occur in a trend. As previously explained, 61.8% is a key number in the Fibonacci sequence, which is why it is commonly called the Golden Ratio.