There are many analysis methods that can be used to find the fair value of stocks, the cash flow of a company, or predict a future trend. Many of these methods use mathematical calculations as a basis.

You may therefore deduce that as you don’t know much about mathematics, you won’t be able to make money when you try to trade in the financial market. This deduction would however be wrong. There are many off-the-shelf methods available that will allow you to analyze asset prices.

Trading using Fibonacci sequences is one example of how an intricate method has been made easy and convenient to apply. Programmers have created several proved tools traders can use for analyzing prices.

Fibonacci theory is derived from the so called “golden ratio”, which is the ideal ratio of an object’s part to its complete form. When using this method while trading, many price benchmarks are generated that can have an effect on the trend.

A Fibonacci sequence is a sequence of numbers where each number is calculated by adding the previous two, i.e. 1, 2, 3, 5, 8, 13, 21…

In this article, we’ll discuss the two approaches that are most popular – a Fibonacci Fan and Fibonacci levels. These are used by traders to determine price levels where positions should be opened when predicting a new trend. We will show you how to:

• Configure the tools on charts.
• Place stop losses and take profits.
• Find strong resistance and support levels.
• Use Fibonacci analysis together with other tools.

OlympTrade & Fibonacci fan

When using a Fibonacci fan, a number of diagonal rays with various angles of inclination as displayed on the chart are used. The rays not only affect the levels, but can also activate or halt a trend.

In the image below, random price lows and highs were chosen and a Fibonacci fan was stretched along these benchmarks.

In the next image, the Fibonacci Fan’s rays highlight a number of reliable signals where trades following an uptrend can be opened. There is also a very good entry point to a long trade.

Fibonacci levels

Fibonacci levels consists of a series of horizontal lines at varying distances from one another. These are put into a chart automatically once a high and a low have been connected for a downtrend, or a low and a high if there is an uptrend.

Each horizontal line is given a value from 0 to 1. Traders define these benchmarks as being auxiliary or important ones. Historical data analysis confirms this relative division.

0% (0)	calculation starting point
16% (0,16)	auxiliary level
23,6% 0,236)	important level
38,2% (0,382)	important level
50% (0,5)	important level
61,8% (0,618)	auxiliary level
76,39% (0,7639)	auxiliary level
100% (1)	calculation endpoint

Let’s now look at a few examples:

In the image below a EUR/JPY currency pair chart is shown, and you can see that a random high has been connected to a random low (the two squares on the chart). This will allow the impact various levels will have on more price behavior to be assessed.

In this example, the price accelerated its downward movement after breaking out of a different Fibonacci level, or bounced off the levels. Traders can therefore get many signals in this scenario.

Some traders are of the opinion that a 0.5 level breakout identifies a reliable trend reversing signal.

A Fibonacci fan is better for trading when following trends, but Fibonacci levels helps traders to navigate a sideways trend better.

Chart analysis using Fibonacci

There are many different approaches that can be used to analyze charts by using Fibonacci. One popular method uses a number of time frames. When this method is used, only short-term trades are made while the Fibonacci tools are placed on higher time frames.

You could for example use a 4-hour time frame for a specific asset and stretch the Fibonacci levels between the last high and low.

The same can in fact be done for all relevant assets before a trading session starts to obtain more signals as the session progresses.

If you switch to a lower time frame at this stage, you will be able to determine:

• Best levels for placing the Take Profit and Stop Loss limiting orders.
• Suitable entry points.
• The behavior of the price at various important levels (whether the market was flat or produced a fast reaction before the activity became more).

Look at the image below:

• The best level for a stop loss can be found for the current short trade.

• This approach will allow a trader to invest by shorting the asset with a trade order.

Take profit and Stop loss

Placing Take Profit and Stop Loss at the correct levels is a crucial element of just about all trading strategies. Basic technical analysis often won’t provide this data but using Fibonacci will.

Although Fibonacci tools are very efficient in analyzing markets, their value for risk management should not be underestimated. Below we discuss some ideas on how you can place your Take Profits and Stop Losses using the tools described above:

• The Take Profit should be set close to the ray in the trade’s direction, or the closest level.
• When going short, the Stop Loss should be set slightly above the ray that is above the asset’s current price, or the closest Fibonacci level.
• When going long, the Stop Loss should be set slightly below the ray that is below the asset’s current price, or the nearest Fibonacci level.

In the image below, there are two sensible zones for setting Take Profit and Stop Loss. It should be noted that although the rays are more flexible, levels tend to provide data that is more accurate.

The Stop Loss and Take profit can for example be moved constantly due to the lines’ slope. This will enable risk reduction and making more profits.

Although the Stop loss has been shifted down in the image below, it remains higher than the Fibonacci ray.

What tools can Fibonacci methods be combined with?

Traders use Fibonacci methods to assist them in predicting trends, determining targets, and optimizing risks. Each signal can however be verified by an additional analysis tool, and sometimes should be:

1. Using of both the levels and fan simultaneously. When doing this, the signals provided by both tools should be used.
2. Using resistance and support levels. If a chart for example goes down to a Fibonacci fan’s ray, this is a signal to buy. It is easy to confirm this signal by checking if there is a support level close to the current price.
3. Using oscillators. When the Fibonacci rays or levels are showing a buy signal, while an oscillator, e.g. the RSI is in oversold, the probability of making a profitable trade increases significantly.

The best time frames for Fibonacci trading

Fibonacci methods can be utilized with any time frame. Everything will follow the golden balance or ratio.

Skilled intraday traders however still favor trying to locate entry points within a 5 minute time frame. Traders holding positions for two days or more should use time frames that are four hours or longer.

Setting a Fibonacci tool on charts

Let’s now take a look at how you can place Fibonacci levels or fans on charts. Both of these tools are located in the Indicators sector on Olymp Trade’s platform.

Configuring Fibonacci levels:

1. Click on the Fibonacci levels menu option in the Indicators section on the left of the screen.
2. If the trend you’re interested in is moving upward, left-click on the closest price low.
3. Stretch the scale to the price high you want to included and then left-click again.

Note: For trends that are moving downward, left-click on the high before the low.

Configuring Fibonacci fans:

1. Click on the Fibonacci Fan menu option in the Indicators portion on the left of the screen.
2. If the trend you’re interested in is moving upward, left-click on the lowest price low and then the highest high. This is shown by the red fan in the image.
3. If the trend you’re interested in is moving downward, first left-click on the high, and then the low. This is shown by the blue fan in the image.

When first trying to use this method, it may be difficult, but once you’ve managed to make the first markings successfully, the effectiveness of these tools will become apparent. As always, it is highly recommended that you first start experimenting by using your free demo account before starting to use real money.