Fibonacci Numbers & Tools

◙ Primary Use: Identifying Trends and Spotting Reversals

◙ Trading with Fibonacci: Calculating Support & Resistance Levels

◙ Typical Levels: 0.236 | 0.382 | 0.500 | 0.618 | 1.000 | 1.618 | 2.618 | 4.236

 

 Introduction to the Fibonacci Sequence

Leonardo Pisano, also known as Fibonacci, was a renowned 12th-century Italian mathematician who introduced a remarkable sequence of numbers—now called the Fibonacci sequence.

Book on Amazon: Trading World Markets Using Phi and the Fibonacci Numbers

This infinite sequence is defined by the rule:

General Formula:

• X(n) = X(n-1) + X(n-2)

Example:

0 | 1 | 1 | 2 | 3 | 5 | 8 | 13 | 21 | 34 | 55 | 89 | 144 | 233 | ...

Where each number is the sum of the previous two (e.g., 5 = 2 + 3, 13 = 8 + 5).

Chart: Applying the Fibonacci Retracement tool to spot support and resistance levels

 The Golden Ratio: 0.618 and 0.382

One of the most fascinating aspects of the Fibonacci sequence is that the ratio of consecutive numbers converges toward 1.618—known as the Golden Ratio. Its inverse, 0.618, is equally significant.

• Golden Ratio (Φ): 1.618...

• Inverse: 1 ÷ 1.618 ≈ 0.618

• Complement: 1 − 0.618 = 0.382

Examples from the sequence:

• 13 ÷ 34 = 0.382

• 21 ÷ 55 = 0.382

• 34 ÷ 89 = 0.382

This ratio appears across nature, the human body, architecture, and even financial markets.

 

Trading with Fibonacci Numbers and Their Products

Fibonacci levels are widely used by traders to anticipate key market turning points and make more informed decisions. Here's a breakdown of the most popular Fibonacci-based tools:

 

1. Fibonacci Fans

Fibonacci Fans are diagonal lines that extend from two key price points—typically a major high and low. These lines are drawn at angles derived from Fibonacci ratios (0.382, 0.50, 0.618) and help identify potential support and resistance zones as price moves forward in time.

 

2. Fibonacci Retracements

This tool helps traders estimate potential retracement levels during a trend:

• In a bullish trend, traders look to buy at Fibonacci support levels.

• In a bearish trend, traders may sell at Fibonacci resistance levels.

Commonly used retracement levels:

• 23.6% | 38.2% | 50% | 61.8% | 78.6%

 

3. Fibonacci Expansions

Fibonacci Expansions (also called Extensions) are used to project price targets beyond a current trend move. They are calculated based on prior price swings and drawn as horizontal lines above or below the existing trend. These levels can also serve as future support or resistance.

 

4. Fibonacci Time Zones

These are vertical lines placed at Fibonacci intervals from a selected starting point. Time Zones help identify potential periods of volatility, where important price movements or reversals might occur.

 

5. Fibonacci Pivot Points

Fibonacci Pivot Points are calculated price levels that help traders identify trend direction, support/resistance levels, and potential entry/exit points. Typically calculated on a daily basis.

• Pivot Point (P) = (High + Low + Close) / 3
• Support 1 (S1) = (2 × P) − High
• Support 2 (S2) = P − (High − Low)
• Support 3 (S3) = P − 2 × (High − Low)
• Resistance 1 (R1) = (2 × P) − Low
• Resistance 2 (R2) = P + (High − Low)
• Resistance 3 (R3) = P + 2 × (High − Low)

More about ► Fibonacci Trading on TradingFibonacci.com

 

Platform Setup in MetaTrader 4/5

To use Fibonacci tools in MetaTrader:

1. Go to: 

   INSERT → FIBONACCI → [SELECT TOOL]

2. Choose from the following tools: 

   Retracement, Expansion, Fan, Arcs, or Time Zones

3. Commonly used levels:

   0.236 | 0.382 | 0.500 | 0.618 | 1.000 | 1.618 | 2.618 | 4.236

 

Summary: Fibonacci Number in Trading

Fibonacci tools offer a structured way to analyze market movements, forecast price behavior, and enhance trading strategies—when used alongside other indicators.

 

■ Fibonacci Trading

George Protonotarios for ExpertSignal.com (c)