In the world of trading, there are numerous strategies and techniques for forecasting the markets. One of the most used and known is undoubtedly that of Fibonacci. It is based on the numerical series discovered by the Italian mathematician of the same name. Fibonacci trading allows for identifying areas where price tensions could occur and could provoke a new strong market push or a strong rebound.
What Is the Purpose of The Fibonacci Trading Strategy?
This strategy has the primary purpose of predicting new trends as accurately as possible. It foretells the moment in which the price will resume a new definite trend route after a tracing phase. Each trend never follows a stable and linear path. It undergoes various variations (upwards or downwards), which draw a graph. It is possible to observe the entire trend by that graph accurately.
It may seem obvious to you, but one of the fundamental requirements for the Fibonacci strategy to be implemented is precisely the existence of a trend. Thanks to this, we can trace the various levels. Besides, it is recommended to use a timeframe in the medium / long term.
The reduced deadline could dramatically reduce the reliability of the strategy. In particular, the most used are the Daily or H4.
Below we offer a detailed guide useful for understanding and optimally implementing the Fibonacci strategy:
1. Draw the Levels on The Platform:
Once the dominant trend has been identified, identify the extremes (minimum and maximum value). Start drawing the traces until you get a well-defined ” tracing level. “Once this is done, you can have two different types of trends ahead of you: bullish or bearish.
If the trend is bullish, you have to connect the minimum value to the maximum value through a line. If the trend is bearish, you have to perform the inverse operation. It means to connect the utmost value to the minimum value always through a line.
The level lines will start from these two points indicating 100% and 0% Fibonacci.
2. Use the Traces as Supports or Resistances:
When the values of the price approach the reference levels, you will have to pay close attention. It could undergo a rebound or break the level and then continue its trend by going in counter-trend.
Although in exceptional cases it is highly discouraged to go in counter-trend. To understand what the price behavior will be, Fibonacci’s strategy is not enough. It would be best if you relied on other technical analysis tools.
The most important are:
3. Dynamic trend lines:
Through which we can compare what has happened in the past with current behavior. Therefore, understand if the price will rebound or continue in counter-trend;
4. Candlestick analysis:
Each “candle” is arranged following a particular shape and a specific sequence. These candles indirectly describe the general situation of the trend. This way you can understand if you are facing a bullish or bearish model;
5. Technical indicators:
They represent another method of approach to the Fibonacci levels. This can send two different signals to the investor or a SALE SIGNAL or a PURCHASE SIGNAL.
In conclusion, the Fibonacci Numerical Series is undoubtedly versatile and useful in the world of trading. A tip to take into consideration is not to use this strategy if it has not been studied and learned optimally before. Just one mistake is enough to distort the result and obtain a final result that is anything but positive.