Since the beginning of 2021, I've been reviewing more of the advanced classes from teachers Chris Burgess and Alphonso Esposito. You can quickly find those blogs by clicking on the Beyond FOSO link under the Blog Categories on the right-hand side of this page. Those blogs cover such topics as analyzing the market, risk management, and gap trading. And in continuing with more advanced classes, today we are looking at adding one of the more curious tools to our trading toolkit, the Fibonacci numbers, and how we can apply this universal sequence to improve our trading results.
The Fibonacci sequence is a series of numbers where each number in the sequence is the sum of the two preceding numbers. The sequence itself is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on. This numerical sequence is fascinating because we can find examples of the sequence naturally occurring in the world: the spiral of a nautilus shell, the formation of a hurricane, the shape of a pineapple, and the list goes on. Simply put, the Fibonacci sequence is part of the very rhythm of life and a rhythm that can even be found in the financial markets.
Yes, even in the financial markets. When you objectively observe market swings on a candlestick chart, the support and resistance points of a stock are often located near or directly on logical Fibonacci Ratios. So, to do this, we need to know the three main ratios which the Fibonacci tool uses, and they are 0.618, 0.382, and 0.50.
When adding the Fibonacci Ratios to your candlestick chart, you always want to work from right to left on your chart. Then find the beginning and end of a range to be measured by locating pivot points such as gaps, areas of significant price movement while keeping an eye out for secondary price moves.
Once you have the top and bottom or your support and resistance lines placed on your chart, you can then make the necessary adjustments to your Fibonacci placement by ensuring the .50 retracement is within a gap or a significant move within the range if possible. Then use historical pivot points as a means to confirm you are correctly identifying the Fibonacci framework.
When using the charting application, there are a few tips to keep in mind, such as drawing your retracement lines across the entire screen. Plus, when placing your Fibonacci lines on your chart, you can use a significant price moves when there is an absence of gaps. Start and stop your lines where you know the market has changed directions, and finally, always be willing to test different pivots to confirm.
The responsibility of every analyst is to determine the framework of the market and apply that knowledge within a forecasting model. The Fibonacci tool provides target zones that quickly identify a stock's framework on the candlestick charts. These target zones are an excellent way to answer the two most essential questions in market analysis: where should the market be trading and where should the market not be trading? After all, a market analyst must answer these questions consistently from both a bullish and a bearish perspective to be effective and the Fibonacci tool will allow you to do just that.