As it pertains to the financial markets, the golden ratio is applied via many forms of the Fibonacci indicator. One of the most famous is the Fibonacci Retracement tool. According to the golden ratio, these lines should indicate the points where levels of support and resistance are met. Fibonacci extension levels are not used as much as retracements, but they are still worth examining. As opposed to Fibonacci retracement levels, which are spread between the swing low and swing high, Fibonacci extension levels reach past the swing high or swing low.

If your day trading strategy provides a short-sellsignal in that price region, the Fibonacci level helps confirm the signal. The Fibonacci levels also point out price areas where you should be on high alert for trading opportunities. https://www.bigshotrading.info/ In the above scenario, for example, if you see the stock drop by 38 cents from $11 to $10.62, you can note that it’s a Fibonacci number. That may be a good opportunity to buy, knowing that the stock will likely bounce back up.

Downtrend

Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 0.618 Fibonacci retracement that is often used by stock analysts approximates to the “golden ratio”. We can create Fibonacci retracements by taking a peak and trough on a chart and dividing the vertical distance by the above key Fibonacci ratios.

The price reached the extension level of 127.2 in point 1 and bounced back. As the Fibonacci Retracement price levels are static, they can be very easily identified. It helps to react prudently when the price levels are tested. A stop-loss might be set at the 61.8% level, as a return below that level could indicate that the rally has failed. Developed by Leonardo Fibonacci in 1170 AD, Fibonacci ratios represent a set of key numbers created by considering two extreme points of the ratios.

Using the Fibonacci Retracement Rool in a Downtrend

Fibonacci levels are derived from a number series that Italian mathematician Leonardo of Pisa—also known as Fibonacci—introduced to the west during the 13th century. Fibonacci levels are based on the so-called Fibonacci sequence. It’s just an observation that after a particular move in the direction of the prevailing trend, prices tend to retrace a portion of it, before the main trend is resumed. Tradeciety is run by Rolf and Moritz who have over 20+ years of combined experience in Forex, stocks and crypto trading. In my strategy, I use the Fibonacci extensions to find trends that have completed an ABCD pattern and are likely to reverse. The Fibonacci levels are %-based which means that even when you draw them differently, they will often line up correctly. In the above case, you said that the first level retracement is up to 61.8 and then look for 38.2 and so on.