Fibonacci Definition Trading
Some people may have heard of the famous Fibonacci sequence. This peculiar series of numbers seems to appear everywhere in nature, and can also be seen in ancient Indian mathematics related to Sanskrit poetry. Our modern understanding of the sequence is attributed mainly to its appearance in the 13th century book Liber Abaci, by Italian mathematician Leonardo of Pisa, also known as Fibonacci.
The sequence consists of numbers which are the sum of the two preceding numbers (i.e. 1, 1, 2, 3, 5, 8, 13, etc…). Fibonacci famously described the sequence after observing the growth of rabbit populations. The numbers in the sequence are related to the “golden ratio”, and are widely studied due to their prevalence in nature, and their wide range of mathematical applications.
Fibonacci definition Trading refers generally to Fibonacci sequence mathematics applied to trading. There are a few different examples of this, such as using Fibonacci in day trading to analyze support and resistance graphs. Fibonacci method trading is a diverse field of these sorts of applications, and some of them may be useful to those willing to put forth the effort to understand them.
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Examples of Fibonacci Trading Patterns
A good way to demonstrate how to use Fibonacci in day trading is through Fibonacci retracement. These are ratios derived from the Fibonacci sequence used to identify potential reversals.
Fibonacci observed that each number in the sequence divided by the following number is approximately 0.6180. Each number divided by the number two ahead of it in sequence is approximately 0.382. These two numbers form the two most common retracement levels used in Fibonacci method trading, 61.8% and 38.2%.
The retracement levels are points where there is a potential trend reversal. While this method is popular among chartists for monitoring potential reversals, there is no definitive way of predicting precise data using this method. These retracement levels simply indicate theoretically higher potential for earlier trends to retrace. Some traders find this method useful for predicting market activity.
Using other analytical skills in tandem with Fibonacci intraday trading is key. No method of analysis is perfect, and observations of Fibonacci method trading are no different. Reading up on the Fibonacci sequence, as well as other principles of chart analysis is a good idea if you want to apply Fibonacci method trading.
When Is Fibonacci Trading Used
Fibonacci trading can be applied in a variety of ways, and to varying degrees of effectiveness by traders of different types. The earlier example demonstrates how Fibonacci ratios can be used to predict potential retracements. There is also the example of Fibonacci extensions, which can be used to predict potential areas of support or resistance.
By extending the levels beyond 100%, traders can employ Fibonacci plan profit targets and good potential exit points. The main extension points used in this method are 161.8%, 261.8%, and 423.6%. Using this method, traders can extrapolate the potential alert zones they identify with Fibonacci retracement levels, and use that data to plan their exit point accordingly
While these methods demonstrate two of the potential ways that Fibonacci numbers and their ratios can be applied to day trading, there are some things that are important to keep in mind. When using Fibonacci method trading, the different methods and relationships can become very complex very quickly, and there’s no guarantee that another method of analysis won’t yield similar results.
That being said, some traders believe in the golden ratio, and the relationships it has with the Fibonacci sequence. There is no doubt that Fibonacci patterns appear frequently in nature. Reading further about different methods for analyzing and predicting market activity using Fibonacci method trading is a good first step in applying these ideas to your own day trading methods.