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The Magic of Fibonacci

For beginners by Trend Mentors

To trade without using Fibonacci ratios is not really an option, it is such a helpful tool, so you better
learn how to use it. Fibonacci is a huge area to cover and there are many different Fibonacci variants
but in trading it is only important to learn two, retracement and extension.

Leonardo Fibonacci was a famous Italian mathematician, he discovered that a simple series of
numbers created ratios describing the natural proportions of almost everything in the entire
universe.

The Fibonacci numbers were first introduced in 1202, allegedly the knowledge of the numbers
originated from the Hindu-Arabic arithmetic system, which Fibonacci studied while growing up in
North Africa

The Fibonacci sequence, has turned out to be one of the most interesting things ever written down.
We can find Fibonacci’s sequence in all shapes and mostly fascinating is the appearance of Fibonacci
ratios, in arenas that seems to be far off mathematics such as proportions of body constructions,
face shapes or just plain good old nature.

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Fibonacci Sequence and the Golden Ratio

So, who wants to learn a lot of sequences and maths by heart – hands up?
No – I did not think so. But the beauty is you don’t have too, the sequence and ratios between them
are neatly built into various tools to use to help in your daily trading decisions.

But for the fun of it lets look at the Fibonacci sequence, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… and
so on and on. This series of numbers simple works like this 2+3 gives us 5, 3+5 gives us 8, 5+8 gives
us 13, and so on and on.

Nothing special, yea I know but then comes this, if you measure the ratio of any number next to the
higher number, you get .618. For example, 34 divided by 55 equals .618.

0.618 is the magic number, also called Fibonacci Golden Ratio.

Now, the real magic, is that you can find it anywhere, even on yourself! Take your length and divide
by the length from your belly button to your feet. The result should somewhere close to 1.618.
Beats me how it can fit all, but then again, I don’t really understand how a fax works either but, hey
the golden ratio is everywhere.

Basically, there are a few numbers you need to know to make good use of this in trading, and they
are the following:

Fibonacci Retracement - 0.236, 0.382, 0.500, 0.618, 0.764


Fibonacci Extension Levels - 0, 0.382, 0.618, 1.000, 1.382, 1.618

Traders will also very often use the 0.50 ( 50% level) – although this is not a true Fibonacci number.

……. wicked right?

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Fibonacci Retracement and Extension

You don’t need to remember these numbers or how to calculate them, the software you use on your
charts will do the trick, but you need to know what you are looking for.

As with many aspects of trading, key is to identify the direction of the trend. Then first we can know
how to trade the give situation. The case with many indicators and tools of technical analysis is that
the longer time frames will often give you a better accuracy since it’s based on a larger sample of
movements, just keep it in the back of your mind.

Retracement Levels

0.236, 0.382, 0.500, 0.618, 0.764

Once we established what trend the coin is moving towards, that’s where the retracement levels
come into play, as coins often retrace to these levels before they continue the direction of the trend.
The use of Fibonacci retracement levels offers three levels of potential support in an uptrend and
three levels of resistance in a downtrend. They are the 38.2%, the 50% and the 61.8% levels.

The retracement levels we mostly use to find potential support and resistance areas, and we are not
alone in universe doing so, far from, so because of the Fibonacci tool these levels become extra
strong as many traders make their decision based on it. Especially in markets as small as crypto. This
is also something to take into consideration if you want to trade more conservative and always be
filled on your orders, to not be exactly on a fib level.

When the market is trending up, and we want to buy, we would want to find the level to do so, at a
Fib support level. When we want to sell, we would choose to do so at a fib resistance level.

Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618

The extension levels we usually use as a tool to find profit taking areas. And let’s be clear that
everything is areas and where you place your sell orders is also based on how conservative as a
trader you are. Same applies here as with the retracement levels, we are so many that use this
knowledge to guide us, so it becomes a sure date.

To apply Fibonacci levels, you need to identify from where the coin has its highest and lowest points
in the area you are looking, this is called swing high and swing low.

• Swing high is a candlestick with at least two lower highs on both the left and right of itself.
• Swing low is a candlestick with at least two higher lows on both the left and right of itself.

To apply the fib tool on the chart, for downtrends, do it swing high to swing Low, and for an uptrend,
find the swing low to swing high. Its best you pull up a chart and start playing around.

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What Fibonacci levels are strongest?

When we are in an uptrend, price usually retraces to the 0.5 or maybe even to the 0.618 but usually
the candle close is somewhere around the 0.5 fib line. If the close of the candle is above the 0.5 fib
line it usually means that the price found solid support and is ready to continue its way up. The same
goes to when in a downtrend.

On the other hand, when looking to take profit and applying the Fibonacci extension you should look
at the area around the 0.618 since that is where the main resistance/support usually is. If you are
longing, ensure to place your close just below the 0.618 fib line and when shorting ensure to take
place your close just above the 0.618 fib line. This method will put your mind to rest that you are
positioned to take profits without having to deal with whether price will break major
resistance/support area.

Confluence

As we all learned the hard way watching green candles change into red, nothing is bullet proof,
sometimes it just blows trough every level and continue its way and that is nothing we can do a
thing about, but with using Fibs you have much better odds in finding correct info to base your
decisions on.

No tool or indicator work on its own, that’s why one need to combine several to get as near as we
possibly can come to a bullet proof decision. Which ones to use to get the confluence we need is a
preference, but leaving out Fib's is not possible, it’s a superior tool.

Confluence is key to all our decisions and Fibonacci helps us getting there.
What do we mean with confluence in trading?

Confluence is the combination of several tools/indicators or even strategies and ideas into one
decision. Confluence is what happens when two or more separate indicators/tools are used together
and come to the same conclusion. For example, the 0.618 line meets the basis line of the Bollinger
Band. Confluence is crucial to ensure that major support/resistance areas are found and plotted.
Confluence area usually means an entry point for a trade.

…. and then we short!


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