The Fibonacci sequence technique

The Fibonacci sequence technique is an indicator technique of technical analysis in stock investment.

The Fibonacci sequence technique is based on the principle of the Fibonacci sequence of numbers. The Fibonacci sequence is a sequence of numbers that start with 0 and 1, and the number following is the sum of the two preceding numbers.

Fibonacci numbers: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, …

From this series of numbers, people divide the numbers in the series and discover the ratios: 161.8%, 23.6%, 28.2%, and 61.8%. Many analysts consider these ratios to be prominent levels in trading and technical analysis. Basically, there are 3 commonly used importance levels which are 23.6%, 38.2%, and 61.8%.

In Fibonacci analysis, there are three most commonly used types:

  • Fibonacci retracement.
  • Fibonacci fan.
  • Fibonacci arc.
1. Fibonacci retracement.

Fibonacci retracement is used to predict support and resistance levels at which the price is likely to reverse. The Fibonacci retracement represents the respective horizontal proportions. The plan is to buy at the Fibonacci support levels when the market is trending up. Sell ​​at the Fibonacci resistance when the market is in a downtrend.

How to draw a Fibonacci retracement:

  • First, identify recent price trends for tops and bottoms.
  • Then, for downtrends, connect from the nearest top to the nearest bottom. For an uptrend, drag the mouse from the nearest bottom to the nearest top.
  • The Fibonacci retracement rates will appear on the chart to observe.

The Fibonacci sequence technique

2. Fibonacci fan.

The Fibonacci fan represents diagonal trend lines in corresponding proportions. The Fibonacci fan predicts the price of a trend reversal when it encounters a proportional trendline. From there, give trading suggestions when the price approaches the trendline:

– Buy when the price retraces to a Fibonacci fan line, the price must bounce back. That is, the price touches the Fibonacci fan line but does not close below it.

– Sell when the price bounces to a fan Fibonacci line, the price must retrace. That is, the price touches the fan Fibonacci line but does not close above it.

How to draw a Fibonacci fan:

  • First, identify recent price trends tops and bottoms.
  • Then, for downtrends, connect from the nearest top to the nearest bottom. For an uptrend, drag the mouse from the nearest bottom to the nearest top.
  • The fan Fibonacci trendline ratios will appear on the chart to observe.

The Fibonacci sequence technique

3. Fibonacci arc.

Fibonacci arcs represent proportional arcs extending from a line connecting the top and bottom of the previous trend.

Fibonacci arc is similar to Fibonacci retracement when it comes to resistance and support levels. But the Fibonacci retracement represents fixed thresholds over time. And Fibonacci arcs represent thresholds with different timeframes in arcs.

How to draw a Fibonacci arc:

  • First, identify recent price trends for tops and bottoms.
  • Then, for uptrends, connect from the nearest top to the nearest bottom. For a downtrend, drag the mouse from the nearest bottom to the nearest top.
  • The arc Fibonacci ratios will appear on the chart to observe.

The Fibonacci sequence technique

To use the Fibonacci sequence technique, the first thing is to determine the previous trend of the price. Investors should use other tools and techniques to identify the previous trend such as the Trendline technique, and the Elliott wave principle technique

On the other hand, when drawing Fibonacci lines, it is recommended to draw 2 or 3 different Fibonacci lines for analysis. When the price approaches the intersections of the Fibonacci lines there is a higher possibility of a reversal.

Conclusion:

Although the Fibonacci sequence technique makes it possible for investors to find potential support or resistance points, there is no guarantee that the price will react well to those levels. When the price reaches the potential reversal areas, it does not mean that the price will automatically reverse, but these are just potential areas to observe. Besides, Fibonacci has many price resistance lines, whereby the price will often reverse at these lines. It is difficult for investors to determine which is the most effective resistance. Therefore, in these potential areas, investors need to combine technical analysis tools to know short-term trading points.

Hope you get the basic knowledge and effectively use the Fibonacci sequence technique in your trading.

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