The Fibonacci retracement tool was first introduced by an Italian mathematician Leonardo Pisano Bogollo in the 13th century, and since then it is universally preferred by many traders. This string of numbers has unique mathematical properties and has a wide-ranging presence in the financial markets. Hence, traders use Fibonacci trading strategies to identify volatility in the market.
It is highly advisable for a trader to learn Fibonacci retracement levels if they want to earn maximum returns. Fibonacci is a series of numbers, where a number is found by adding two numbers before it. It starts with 0 and 1, the sequence goes to 0,1,1,2,3,5,7 and so on. It divides the vertical distance by the ratios of 23.6%, 838.2%, 50%, 61.8%, and 100%
Fibonacci levels provide price levels to traders of support and resistance where a reversal in direction can take place and can be used to establish entry levels. These retracements levels depend upon the previous moves of the market. By using the Fibonacci trading strategy, traders can go one step ahead and add in more technical analysis to confirm whether the market will actually move or not. If Fibonacci ratios give us the area to buy or sell, then the price action strategy can help us decide when to buy and sell.
Two of the most used price action trading patterns are 'hammer' and 'shooting star.' The hammer pattern is a bullish signal which conveys the failures of sellers to close the market at a new low and buyers coming back into the market, to close in the high. A shooting star pattern is the exact opposite of the hammer pattern. It is a bearish signal which conveys the failure of buyers. So, you may wonder how can we use these patterns with trading Fibonacci? It is important to note that in the past, traders have combined these two strategies and have got effective results. Fibonacci retracement in Elliott waves theory plays an important part as it refers to a market condition that is expected to end at the areas of support or resistance denoted by key Fibonacci levels.
One can also use Double tops and bottoms and rectangle tops and bottoms to predict the market movement. You can now try the Fibonacci trading strategy on either demo or live account. There are several interesting free Fibonacci tools software available for training, so why not try it out!