The Fibonacci level is one of the technical indicators used in trading to identify retracement levels, which often act as support or resistance. Using this indicator, you can predict the target zone of the likely continuation of the trend, as well as the reversal points when it changes.
The calculation of Fibonacci levels is based on a number series called the Fibonacci sequence. The first time a description of this sequence of numbers is mentioned is in the 13th century work “Liber abaci” (Latin “Book of Accounts”), written by Leonardo of Pisa. His nickname Fibonacci comes from a combination of two words filius Bonacci (lat. son of Bonacci).
The number series is a step-by-step number system in which each next term is equal to the sum of the two preceding terms (0+1=2, 1+2=3, 2+3=5, 3+5=8, etc. ad infinitum).
Leonardo Fibonacci researched and described the properties of the series:
Any market is formed by supply/demand and is spontaneous, but it also obeys the laws of nature. Comparing the wave movement of the asset price with Fibonacci levels trading helps to determine the level of pullback or recovery when the price moves along the trend.
How to plot Fibonacci levels on a chart
The construction of the grid on many trading platforms is automated and comes down to specifying two points for the beginning and end of the trend.
On the one hand, everything looks simple. Select the Fibonacci Levels tool and connect the trend start point with its end point from left to right.
Many believe that this method is the only correct one for daily and weekly timeframes.
But on smaller timeframes, there is some difficulty in building that comes up.
According to the wave theory of Ralph Elliott, the trend has a clear structure of waves: three impulse and two corrective ones. And the impulse ones it consists of, in turn, have the same structure. Because of this, choosing a trend is not a trivial task. In the case of correct construction of Fibonacci lines trading, you can see that they coincide with the support and resistance levels. This is a sign that they can be used to make predictions about the direction of the price.
Advantages and disadvantages of the indicator
The above mentioned indicator is one of the most accessible TA tools for predicting price movements. It is intuitive even for novice traders.
Using Fibonacci retracement levels helps to determine points for buy and sell orders. With an aggressive strategy, you can enter the market every time the price reaches one of the levels. With a balanced approach, it is better to wait for a level retest and then enter on a breakout rebound.
It is up to you which strategy to choose.
The disadvantages of the Fibonacci Levels indicator include the subjective nature of trend selection. If it is defined incorrectly, then the indicators will be uninformative.