Why is Fibonacci Important?
Traders who manage money try to guess possible moves and the direction the related asset will travel in order to make successful decisions regarding the financial asset that is subject to trade.
The trader who completed their search of direction related to the asset with the Fundamental Analysis method decides from which level they will be involved in the transaction and from which areas they will leave the position with the Technical Analysis method.
Especially in this process, the level of trading decisions as a result of the technical analysis method is critical in terms of trade performance as well.
Considering that even 100 thousand dollars is a small amount in the Forex market (global daily trading volumes are estimated at $ 5.3 trillion), it can be said that the performance of traders in determining the entry point of the trade is important in terms of the trading life.
At this stage, the Fibonacci application, which is precisely tracked inside the technical analysis, can enable us to see how both trend activities and in-trend response views will react.
The Golden Ratio / Fibonacci Laws, which take place in all areas of life, from the aesthetic operations to the order of the planets, from a snail’s shell to Leonardo da Vinci’s Mona Lisa painting, have critical importance in the financial market. They are particularly effective in the formation of investor behavior.
Before talking about the effects of the Fibonacci sequence and the Golden Ratio approach on technical analysis, and what traders need to be careful about at this stage, let’s give a brief overview of the Fibonacci sequence and Golden Ratio.
The Fibonacci sequence is a collection of numbers obtained by adding a number with the number that comes before it. Since the first number is 0, this sequence continues as 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610… As a reminder, it is important to understand the concept of adding the numbers with the number that comes before it to reach this sequence to understand the current sequence series. So, to reach number 13, you need to add 5 and 8. For 21, you need to add 8 and 13.
The Fibonacci Golden ratio is described as the number that comes after a specific calculation when we compare the numbers with the numbers before them in this series and this ratio is stated as approximately 1.618.
- 2/1= 2
- 3/2 = 1.5
- 5/3 = 1.666666666666667
- 8/5= 1.6
- 13/8= 1.625
- 21/13= 1.615384615384615
- 34/21= 1.619047619047619
- 144/89= 617977528089888
- 233/144= 618055555555556
After a short brief on the number sequence, we can now talk about how to apply the Fibonacci sequence to financial markets.
The application of the Fibonacci sequence is studied under five main titles. You can see these titles in the “Fibonacci” tab under the “Insert” menu in the Metatrader 4 Platform.
- Fibonacci Retracement
- Fibonacci Expansion
- Fibonacci Fan
- Fibonacci Time Zone
- Fibonacci Arcs
Of all Fibonacci applications, the topics that Forex traders pay the most attention to are Fibonacci Retracement and Fibonacci Expansion. In this training, we will deal with these two topics broadly.
Retracement Application of Fibonacci
Of the five Fibonacci applications, Fibonacci Retracement (FR) is the method used the most by Forex traders, since it is critical for trader performance to be able to examine the concept of the trend towards the financial asset that is subject to trade and in which regions the possible reactions within the relevant trend will be limited.
FR application is obtained with the line taken to the top or the bottom point from the area where the trend starts. In an environment where we will reach the most significant support and resistance points between Bottom and Top levels, it allows us, in particular, to have key insights about where the thought of in-trend response might stop.
In order to access the Fibonacci Retracement application, you can go to MetaTrader 4 platform and see the Fibonacci tab under the Insert menu.
You can see the related support and resistance levels in percentage rates in an environment where we reach the most important support and resistance levels between the Bottom and Top levels with the line that is drawn to the top or bottom from the area where the trend starts. These rates, between 0 and 100, are regarded as particularly 23.6%, 50.0% and 61.8%. In addition to these respective rates, you can add 76.4% or 78.6%. Moreover, if you want the prices to appear on the graph next to the relevant rates, you can add a space % and $ next to the rates in the “Description” section.
You can use the Fibonacci Retracement (FR) application in two stages. The first stage allows us to see the area the support-resistance levels between the respective levels are located in. The second and most important stage provides an important signal regarding where the correction movement, which is the reaction inside the trend, will end; this approach creates an important opportunity for those who follow the trend.
We will evaluate the graph shared above in two stages.
First Step Support- Resistance
As you can see, the levels we explain as Start and Stop are in an upward trend. The rates of Fibonacci 23.6%, 38.2%, 50.0%, 61.8%, and the newly added 76.4% rate can be followed as an answer to the question “Which levels in the FR application drawn from the bottom and the top inside the trend are important?”
The application of support – resistance we drew inside the simple technical analysis can be considered as the realization according to Fibonacci.
Second Step Reaction/ Correction
As you can see, the levels we explain as Start and Stop are in an upward trend. Hence, traders follow the possible turning zones of the trend factor and correction levels while performing trade transactions for the relevant financial asset.
In theory, as an answer to the question “Until when can the corrections (meaning the reactions inside a trend) continue?”, we follow three rates inside the FR application. These are recorded as 50.0%, 61.8% and, particularly, 38.2% . Though the answer to the question above isn’t certain, it is expected that one of these related three areas will have a return.
The rate of 38.2 is explained as the minimum zone in the in-trend response view, and the rate of 61.8 is explained as the maximum response zone. Market sensitivity is important for the answer to the question, “In which region will the related asset end correction?” Hence, those who want to benefit from both in-trend corrections and trend activities can follow these rates.
When we continue to examine the graph, we can see that in the uptrend trend within the Start and Stop zone, the three ratios we have mentioned above in the answer to the question, “Where will the regression starting from the peak zone might end?” are our main focus point. We can see the point where the asset turns is 61.8%.
*** The most crucial thing to remember here is that the point here is an in-trend correction. If the retracements in the up-trend were under 61.8%, this movement could be defined as a trend-changing pricing behavior rather than a reaction.
Where the reactions will end is critical in two perspectives. The first one is the traders who want to benefit from the in-trend corrections. Second, and most importantly, are traders who don’t want the risk of anti-trend positions and who only follow the trend, and want to decide where to make a buying transaction inside the uptrend.
As a consequence, the corrections inside the trend are critical both for benefiting from this correction and for getting the trend returns.
With the application of Fibonacci Retracement (FR), we discussed determining in-trend support – resistance and discovering the correction zones. Now, with the Fibonacci Expansion (FE) application, we will talk about what we should pay attention to in trend targeting after the correction is over.
Fibonacci Expansion Application
Fibonacci Expansion (FE) is the second most used method among Forex traders among the five Fibonacci applications. This is because it is critical for trader performance to be able to examine the trend concept regarding the financial asset subject to trade and examine the levels of the trend targets after the reactions inside the related target end.
*** The most important thing to know for the FE application is for it to be considered after the FR application. In the FR application, this is where the in-trend correction will end, and in the FE application, the area where the related correction ends is taken into consideration.
In the FE application, the area where the correction ends, in addition to the line drawn from the bottom or the top of the area where the trend starts, is also included in the drawing. The aim is for the trend activity to continue towards which level/ levels after the reaction is over. This issue represents the third wave in the Elliot Theory.
In order to see the Fibonacci Expansion application, you can go to the “Fibonacci” tab under the “Insert” menu in the MetaTrader 4 Platform.
When we analyze the graph, we figure out where the regression starting in the peak zone – in the uptrend that takes place in the bottom and top zones – might end with the Fibonacci Retracement application. After that, we need to focus on the levels in which there will be movement in the trend activities.
In the Fibonacci Expansion application, the rates of 61.8%, 100.0%, and 161.8% are significant ratios to be considered in trend targeting. Here, movements above 61.8% (for the uptrend. For the downtrend, the movements below this rate are considered.) may allow us to see that trend activity is more ambitious. With this in mind, pricing behavior towards 100% and 161.8% can be followed. 161.8% can be explained as the maximum rate for current trend targeting; 61.8% can be explained as the minimum rate for trend targeting. The 161.8% rate here also represents the third wave in the Elliot Theory.
When we go on analyzing the graph, we see that in the boxes we specified with the color orange, the asset that ends the correction movement inside the FR 61.8% carried the trend activity to, first, FE 61.8% rate then passed the related rate and carried it to 100%. The asset that completed the targets by getting closer to the related area – to a large extent, even though it didn’t test the 161.8% rate – got pressure in the related area in the next stage. Here, in theory, while 161.8% is a zone that needs to be targeted, the related zone does not always need to be tested.
*** The most essential thing to know about the FE application is that it is actively used after the FR application. For this reason, FE and FR applications need to be used together for traders who consider in-trend correction and trend targeting.
We have talked about why the Fibonacci Retracement and Fibonacci Expansion applications are important and how they should be used. The other three parts of the Fibonacci applications will be shared later in other trainings. It is critical for traders to consider Fibonacci Retracement and Expansion practices as a priority and to become professionals in this subject.