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Fibonacci ratios in financial markets

29-01-2018 | No Views : 212

Fibonacci ratios in financial markets

Fibonacci ratios in Forex are one of the most important instruments in identifying support and resistance. Fibonacci levels are present when the price reaches them, indicating that the price reached a very strong support or resistance level.
Therefore, many technical analysts and traders rely on Fibonacci ratios to determine price reversal areas or to identify entry and exit points. Combining Fibonacci levels with other technical analysis tools gives good results, making you able to identify support and resistance areas well.
But before we look at the Fibonacci ratios in the financial markets, let us identify the famous arithmetic sequence and its presence in nature. We will also address the method of calculating these ratios manually through the sequence.

Fibonacci sequence

The Fibonacci sequence of the famous Fibonacci sequence discovered in the Middle Ages dates back to the Italian mathematician Leonardo de Fibonacci, who was born in Pisa, and is the oldest known literary series.
The sequence starts with zero and the next number is one, and then every two numbers are collected to get the next number for them.

Example of cascading

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, .... To infinity.
We noted above that the Fibonacci sequence started with zero and the next one followed by the sum of the two digits to be the next number one, then the one with the previous one was collected to be the two output, then the two were combined with the one to be the three output, , And so the sequence goes on indefinitely.
The constant relationship begins with successive numbers after the eighth digit in the sequence, since after the eighth digit, if two numbers are taken and the first number is divided into the second number, the result is fixed. It is 0.618, for example dividing by 34 to 55, the result for them is 0.61818, A division of 144 to 233 would have a result of 0.618025 and the output would be close to 0.618.
There is another relationship starting from the eighth figure. When dividing the second number on the first number, the output is also fixed. It is 1.618. For example, if dividing by 55 is 34, the result is 1.61764.

Fibonacci ratios in nature

It is noteworthy that the numbers 0.618 and 1.618 have been discovered in many other phenomena in nature and are not limited to use in the financial markets, but are present in the pyramids when comparing the height of the pyramid half its base, and it is a presence in many natural phenomena, for example Venus It takes 225 days to complete its orbit around the sun and the planet takes 365 days to complete its orbit around the sun, and the output of 225 by 365 is 0.6164 which is very close to the 0.618 ratio.
Dear reader, Fibonacci ratios are present in abundance in nature as they have their own tool in the financial markets as we will talk about them at the bottom. You can read more about these strange ratios and their presence in nature to realize how important and how they can be used in the technical analysis of financial markets.

Fibonacci ratios in financial markets

As mentioned above, Fibonacci ratios are of great importance in the financial markets, and because of their importance, there is an index of automatic extraction on most platforms. We will mention how to use the index and the ratios we will use. There is more than one percentage used in financial markets.

Install a Fibonacci indicator on the trading platform

Although there is a Fibonacci indicator on most platforms, we will discuss the structure of the index on the famous trading platform MetaTrader, because of its fame and reach most of the traders in the Forex market.
Fibonacci
  • There is a Fibonacci indicator in the MetaTrader trading platform in the bar of the drawing tools and not in the indicators segment as shown in the attached picture. To draw Fibonacci levels on the chart we draw the instrument from bottom to top in the upside wave and vice versa for the downside wave by calling from the top To the bottom.
  • The second method is to draw the tool through the click on insert will appear from the list we choose Fibonacci, and we choose the retracement where it is the most used in the financial markets and we will also address the rest of the types in this lesson.

Fibonacci ratios used in financial markets

Here we will examine the Fibonacci ratios used in the financial markets, which are levels of support and price resistance, also called correction levels, and these levels are divided into main ratios and secondary ratios.
Before we look at the ratios used, let's know how to add a ratio to a Fibonacci tool in the MetaTrader trading platform, since some ratios are not on the index.

How to add ratios to a Fibonacci tool on the MetaTrader trading platform

Add Fibonacci ratios
We will use 1.27 as an example, as it is not available on the MetaTrader tool. To add level 1.27, enter the list of settings. Click on the Fibo Level and press the Add button. Then put the value 1.27 in the Level field and the value 127 in the corresponding field. In the attached picture.

Main Fibonacci Ratios:

These ratios represent the most important levels of Fibonacci in the financial markets, as they represent good support or resistance to the price can be relied upon, and are used to extract harmonic trading models.
  • 0.618
  • 0.718
  • 1.27
  • 1.618

The correction level is 0.618

This is the most popular level among analysts and traders because it has an impact on the markets when the price is reached. The price is a sign of confirmation of the change in direction, so it is important to watch the price when it reaches this level. A Japanese candlestick pattern at this correction level is a sign that the price reversal potential is high.
Level 0.618
Looking at the chart in the attached picture, we see the price rise without correction until it collided with the Fibonacci level of 0.618, which acted as a resistance to the price causing the reversal of the trend after touching the price more than once and failure to penetrate the level.

The correction level is 0.786

Although this corrective level is not known among traders and analysts, it is an important level that may reverse the price, which represents the square root of 0.618.
Level 0.786
The price on the chart in the attached picture shows a failure to breach the 0.786 level, although it breached the corrective level of 0.618 and tested it, reflecting that a break of the price to the corrective level 0.618 Fibonacci is a sign that the price may continue to reach the level of 0.786.

The correction level is 1.27

This level represents important support or resistance, as if the price breached to a previous high, this level should be the first resistance to face the price, and the drop below the previous low is the first support that the price may cause.
Level 1.27
In the clear example on the chart in the attached picture, we see the price rise above the top that precedes the price on the left, despite breaking it and stability above it, but the price stopped at the level of 1.27 which represents resistance, causing the decline.

Corrective level 1.618

The price crossed the 1.27 correction level to signal the possibility of reaching the 1.618 Fibonacci level, which represents support or resistance to the price then.
Level 1.618
Looking at the chart in the attached picture, we see that the price hit the corrective level 161.8, after breaching the level of 1.27 Fibonacci.
In the next section we will address the secondary ratios and types of Fibonacci tools on the MetaTrader platform. We will also discuss how to trade on these important levels and integrate them with other technical analysis tools.

Fibonacci ratios in financial markets Part II Technical indicators in the technical analysis of financial markets Part III
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