Trading Essentials - Fibonacci
As promised, this one will be a fun one, before I go back to the main topic for this week - arguably one of the most popular trading tools used by many. Likewise, my sharing is based off how I've learnt and how I try to simplify into layman terms for new investors, seasoned investors please give chance ![]()
Fibonacci was an Italian Mathematician, famous for introducing the Fibonacci Sequence, or you might see things in photography/flower patterns (for all you nerds out there/general knowledge junkies like me). This results in something like a spiral like formation:
Ok now, how does this relate to trading? There's an indicator/tool called the FIBONACCI RETRACEMENT! This tool is amazing, and consist of several numbers, of which the next few numbers are probably commonly used by many (below are essentially referring to the same thing, whether you prefer using the % or the decimal, its the same):
23.6% or 0.236
38.2% or 0.382
50% or 0.5
61.8% or 0.618
78.6% or 0.786
88.6% or 0.886
However many don't know of a very very important one, which is called the Golden Pocket, which lies between the 0.618 and 0.65
Sooooooo.... Ivan, you say so much about fibonacci, how to use in trading?
Ok, here's the thing. For Fibonacci, I don't care who you learned it from. I stand firm by this. There is only one way to draw a Fibonacci, and that is from LEFT to RIGHT (yes seasoned investors, this is the ONLY way and I'm pretty sure of it. If you're drawing from RIGHT to LEFT, please, redraw your fibs...) The levels as explained above for Fibonacci (Fib levels for short), are seen as support and resistance levels. A fib should be drawn from RECENT HIGHS to RECENT LOWS or RECENT LOWS to RECENT HIGHS (I find that the best fibs are drawn from the start to the end of a trend) so e.g. of the below, TSLA daily chart:
As you can see, my fib was drawn from the RECENT LOW to the RECENT HIGH (following the rules of the trend). As a foreword, today's candle hasn't completed yet, but BY USING FIBS, can you see that huge wick at the 0.382? The 0.382 is ACTING AS SUPPORT for price action.
*For fib levels its important for the candles to close PASS those levels (don't count wicks), for the level to be confirmed as support/resistance
Support? Resistance? What's that?
Support refers to a place where price tends to hold, e.g. in an uptrend, price will try its very best to cling on and bounce off the support.
Resistance refers to a place where price struggles to break through, e.g. in an uptrend, whenever price goes up to that zone, it tends to dip right back down.
Old resistance can turn into new support and likewise, old support can turn into new resistance - something to take note of, depending on the direction of price. (i.e. in the above TSLA chart, we can say that the 0.236 has turned from old resistance to new support in the downtrend)
BUT IVAN, YOU SAY WHAT GOLDEN POCKET JUST NOW? CAN EXPLAIN MORE?
Ok, I'm getting to that. But first of all, often than not, when price FIRST approaches the fibonacci levels, there is a high statistical probability that price WILL bounce. The more it tests, the more likely price will tend to break. As for the Golden Pocket? It is ALMOST guaranteed that price tends to bounce at the FIRST touch of the Golden Pocket.
So how do you make sense of this? If e.g. $Tesla (TSLA.US)$ dips to 213.63, and you're in a short position, I would consider taking majority of profits there, wait for the bounce up, before reentering my short position. This would allow me to NET more profits. Also, with regards to price action, you always look to ENTER at SUPPORT and EXIT at resistance. That's one quick tip for swinging/momentum trading.
Hope this has been helpful, and spurs you to look more into the Fibonacci levels!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Just a dumb bull believing that stonks only go up... until there's a reason to cut and cosplay as a bear
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The _Contessa : This is great!!!
thank you for this!
dumb bull ivan OP The _Contessa : Glad this was helpful for you Susan!![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
dumb bull ivan OP The _Contessa : One more tip that I forgot to mention (will add it back above) - to confirm levels, candles have to close pass the levels, only count the body and not the wicks!
103960739 : thanks for sharing. Could you explain based on the stock graph? I noticed there are two circle indicated for lowest point and highest, how does it related to Fibonacci, support, resistance?
dumb bull ivan OP 103960739 : hello! glad you found it useful! thats actually the recent lows to recent highs (while respecting the uptrend, which I mentioned in the post), hope this clarifies
dumb bull ivan OP dumb bull ivan OP : to further clarify, those 2 are my points used to draw the fib!