by What is Fibonacci Retracement?
Fibonacci Retracement is nothing but the number sequence and I told you about the mathematician whose name was Fibonacci and that is why Fibonacci otherwise there’s no meaning.
let me ask you few quick questions to begin this article. how much is 13 divided by 21 check out for yourself next? how much is 34 divided by 55 one more how much is 89 divided by 144 and if you have checked out on your calculator you will understand that the answer for all these three questions is the same is this magic?
What is it hi guys see a Russian Araneta here and I welcome you all to my lecture series on the technical analysis I’m sure by now the excitement already might have begun to build in wherein you might be really curious to know as to how come the answers came same and am I going to teach you mathematics or am I going to teach you something about stock markets the answer is very obvious it’s about stock markets it’s?
An amazing thing that we learn during technical analysis and is known as a Fibonacci retracement. if you want to know more let’s check it out in the next section.
The Fibonacci sequence was 1300years ago that mathematicians in India had actually talked about this concept it was introduced in the West in 1202 basically by Leonardo Pisano Fibonacci which was a mathematician.
What is the the main logic behind these Fibonacci Retracement numbers
Now let’s understand what is the main logic behind these Fibonacci numbers they are said to be natural numbers and what do you mean by natural numbers 0 and 1 are the very base Fibonacci numbers.
Now how is it done just check this out 0 1 are the basic two numbers then we say 0 plus 1 is 1, 1 plus 1 is 2, 2 plus 1 is 3. 3 plus 2 is 5, 5 plus 3 is 8, 8 plus 5 is 13, and so on.
So have you understood what I did I did nothing but I added the current number with the previous number I hope we have understood how the Fibonacci numbers go ahead?
These Fibonacci numbers believe it or not come in very much natural sequence what do I mean these Fibonacci numbers are found in petals of lusts so the majority of the flowers will have either three five or eight petals but you won’t find a flower that will have a number of petals which are not a Fibonacci number in fact the cones in pineapple also follow the Fibonacci sequence.
There are many more references about even breeding cycles of rabbits which also follow a Fibonacci sequence I know it’s very hard to believe but yes that’s how a Fibonacci number sequence can be found in nature as well now there are many people who said that if it is found in nature then why can’t this same logic be followed in the stock market.
this same logic was brought into the stock market wherein we try to calculate the retracement levels but what’s the retracement what does the golden ratio is what we are going to check out in the next section.
Golden Ratio in Fibonacci Retracement
Now let’s talk about the golden ratio which is also called Phi this 5 was divided was actually invented by the Greeks the name Phi was invented by Greeks but very commonly it is known as the golden ratio you can see all the numbers on the charts which are the Fibonacci numbers 1 2 3 5 8 13 21 34 55 89 144 233 so on so forth by now you have understood how these numbers were calculated.
What is golden ratio?
now the question is what is the golden ratio so what you have to do is you have to divide 21 by 89 or let me start in a very simple manner choose any number I’ll tell you to step by step. assume that we have chosen 89 now step number one that numbers divided by the same number 89 divided by 89 and answer is going to be one intelligence.
Now what you have to do you have to divide one number which is immediately previous to that number so which was the number immediately previous to 89 which is 55 so now you do 55 divided by 89 you get the ratio of 0.61 one correct then skip one number and then take the previous number what we skip 55 we take 34 so 34 by 89 and what do we get 0.38.
Now skip two numbers in between which numbers did we skip 55 and 34 so now we do to anyone by 89 right and what do we get 0.23 you can follow this exercise for any damn Fibonacci number take the number divided by itself uncertainty 1 divided the initiate previous number by that number which you have chosen your answer is going to be same which will be 0.6.
Skip that number take 1 number before that divided by the number that you have chosen your answer is going to be 0.38 skip 2 numbers in between take the next one your answer is going to be 0.23 and this is called a golden ratio believe it or not this golden ratio is found again at many places in fact it is said that even our height total height divided by the height of our feet till the navel also follows the golden ratio its amazing to know about how golden ratio exists in nature.
Now the big question how can I use this golden ratio now let’s come to the most important part as to how I can draw this Fibonacci retracement but before we go to the Fibonacci retracement drawing part we must understand the meaning of Fibonacci and retracement.
What is Fibonacci?
Fibonacci is nothing but the number sequence and I told you about the mathematician whose name was Fibonacci and that is why Fibonacci otherwise there’s no meaning.
What do I mean by Retracement?
Retracement is nothing but if there is a specific direction going against the direction as the retracement in the stock market opposite.
if the market is on a downward trend then going from downward to upward is known as a retracement oppositely.
if market is in the uptrend and if market were to go down then it will be known as a retracement on the downside.
Other question is that if market is falling and if we feel that this might be the point from which markets might retrace might go up the big question is to go up then which level and this level can actually be determined by Fibonacci numbers.
Fibonacci Retracement Levels with Example
This is amazing and this is how I have taken a trade, how I took a trade at what level squared off, and why did I choose that level to quit my position that was absolutely based on one thing and that is Fibonacci numbers.
So again one more time what is retracement if markets are in a downward trend we feel that the market might reverse replacement Fibonacci one tells us as to tell what it will retrace till what level it will go up.
So downward to upward retracement and if markets are contingently in the upward trend question is if it were to go down till what level that is again told by Fibonacci retracement.
So let’s see in nifty 50 charts came up then go to full-featured chart so as I mentioned how can Fibonacci retracement help me to make a decision right now if you can see here I will show you how to draw it. Can you tell me which trend is in the chart this is a clear-cut downtrend by the way?
So this was a very clear downtrend and you can easily see a Morningstar candle right if you want to know more about what’s a Morningstar please let me know in the comment section and I would be happy to write a separate post on that.
How to draw a Fibonacci Retracement level
It’s very simple here you can see on the extreme left side something like a 3 shoe and I’m I just clicked on that and here you can see favorite ailment I’m clicking on that
Now what you do is you take the highest point and you join it to the lowest point as shown in the chart but there are theories here some people say you should touch the body of the candle some people say you should touch the wick of the candle by the way what is the body of four candles what is the wick of the candle everything has been explained in one of my basic candlestick patterns post on technical analysis.
So right now what does this signify signifies now can you see these numbers 0.3, 0.38, 0.5, 0.61, .78, 0.5 just like a halfway level so ignore that for the timing 0.23 0.38, 0.5, 0.61, .78 what is that that’s a golden ratio yes so now what does it say if markets are in a downward trend at some point it will reverse could be for a temporary phase but it will reverse.
Question is reversed till what level so what I had done is I had taken a trade hereafter I could see the Morningstar channel and today that is absolutely like within 24 hours I squared off my position with the big make and what level did I place my order is a big question now see here you can see that the level four-point two-three twenty-three percent is eight thousand six hundred and sixty-two so I really this should be the level at which the market should again read place.
So maximum it will retrace from your till twenty-three point six percent so I put a square of order at eight six zero zero and guess what I booked an amazing profit could the market have bounced till thirty-eight percent as well answer is yes.
So I don’t know what happens tomorrow I feel that the markets might go down but again that’s my feeling I might be correct I might be wrong but at least I’m happy I was able to take an amazing trade with the help of only and only Fibonacci retracement.
Conclusion
This is the magic of technical analysis that’s the magic of Fibonacci retracement I hope you have enjoyed this content it was my pleasure to present to you the Fibonacci retracement it’s one of my favorite tools of technical analysis.
Fibonacci retracement for day trading is usually the best trading strategy to take the trade. This setup is very easy and simple to use just you need to keep patience and let your setup form and then you can enter your positions. Stoploss should be the low or high of the inside bar candle for uptrend and downtrend and the target would be as per your risk-reward ratio. One should follow the Risk Management, Money Management, and Fear and Greed concept of the market to avoid big losses.
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