6 Important Things You Need to Know About Fibonacci Levels

6 Important Things You Need to Know About Fibonacci Levels

Most traders might say that Fibonacci is one of the most potent tools in Forex trading, which is the truth. The Fibonacci levels provide traders with a lot of information from stop loss, entry, target and support, and resistance levels. Here are some of the things you should know about the Fibonacci levels.

1.    Fibonacci Sequence Levels Explained

The Fibonacci sequence numbers are famous numbers that are mathematically derived. The list of the Fibonacci sequence goes like this:

0,1,1,2,3,5,8,13,21,34,55,89,144,233… and continues to infinity. This sequence is derived by adding the first two numbers equal to the third number in a sequence, i.e., 0+1=2, 2+3=5, etc. As you add the numbers, the sequence goes up. 

The Fibonacci numbers are an excellent guide for how far an impulsive move or thrust can last in a specific number of pips, which is valid for any currency pair. Higher time frames follow higher Fibonacci sequence levels and lower Fibonacci levels to lower time frames.

2.    Fibonacci Retracement Levels

The Fibonacci retracement levels are calculated by dividing the Fibonacci sequences such as 34/89= 0.618 or 61.8%.

The exception is considered to be at the 50% or 0.5 mark, or the halfway mark. The list of Fibonacci retracement levels 

  • 6% or 0.236 – or 13/55 = 0.236
  • 2% or 0.382 – or 13/34 = 0.382
  • 0% or 0.500 – half way
  • 8% or 0.618 – or 13/21 = 0.618
  • 6% or 0.786 – square root of 0.618
  • 6% or 0.886 – square root of 0.7864

These levels are an excellent method to use when you are doing a measure of the market’s psychology. The 618 Fibonacci retracement is the most important in Forex because it is the Phi, the Golden Ratio, or golden mean. Two quantities are considered to be in the golden ratio if both their ratio is equal to their sum ratio to the larger of both amounts.

3.    Fibonacci Target Levels

The Fibonacci target levels are useful in Forex because they provide a trader with excellent trend exits. The most crucial targets are:

  • -0.272
  • -0.618
  • -1.618

These are not the only targets, and other targets a trader should have on the charts are:

  • -0.180
  • -0.786
  • -1.000
  • -2.000
  • -2.618
  • -4.236

You can add these targets n be added by clicking on the Fibonacci properties, then add these levels in the retracement tool, always remembering to include the minus sign.

4.    When You Should Use Fibonacci

Fibonacci levels are crucial for the identification of support and resistance levels. When using this tool for trading, the trick is knowing when to use the Fibonacci tools. Fibonacci levels have no range of benefits and work better in trend markets. In short, the Fibonacci tools have zero value zones where prices are in consolidation, correction, or sideways moving. 

This is because traders ignore such levels since currencies react to various items and tools like tops and bottoms. If the currency trends or the Fibonacci is used in a higher time frame, the tool works as an excellent asset for giving you indications on where and when the market might turn to the trend’s direction.

5.    How to Use the Fibonacci Retracement

As a trader, you can use the Fibonacci tools to make trading decisions and choose your entry target and stop-loss placement. You can also use Fibonacci retracement for filtering out trade ideas. The Fibonacci is useful as a trigger rather than a duplicate entry. You might have a specific Fibonacci level that you want to trade, and an entry order at the Fibonacci level can be useful in such a situation. You can also use the Fibonacci as a trigger, then enter your trade much later when certain conditions like break out or candlestick patterns have been met.

6.    When to Place the Fibonacci

Ideally, you should not place a new Fibonacci on a new swing high swing low, not unless you have met your target. This is because a trending mode is confirmed by currency pairs when the targets have been met. If the currencies bounce between top and bottom, the currency is considered to be in a range, and traders only like placing a new Fib when the trend is back. The most crucial target levels to hit are -0.618 or 0.272 in the case of 78.6% or 88.6% retracement levels.

Conclusion

Trading using the Fibonacci levels is crucial for your trading success. Learning how to use these tools and when makes the difference between being a successful trader and an average one.