# The Fibonacci Code: How to Use Fibonacci Retracement for Trading Success

This post contains affiliate links. If you use these links to register at one of the trusted brokers, I may earn a commission. This helps me to create more free content for you. Thanks!

In 1202, an Italian mathematician named Leonardo Fibonacci introduced to the world a series of numbers that has had a far-reaching impact on many fields, including trading. The Fibonacci sequence consists of a series of numbers in which each number is the sum of the previous two: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on.

In the world of trading, traders use the Fibonacci retracement tool to identify potential levels of support and resistance in a market. This tool is based on the idea that markets move in waves, and these waves tend to retrace a predictable portion of the previous move.

## Understanding the Fibonacci Retracement Levels

The Fibonacci retracement levels are comprised of horizontal lines that indicate where the price may retrace before continuing its trend. The retracement levels are derived by using the Fibonacci sequence and dividing the vertical distance between a swing high and a swing low by key ratios of this sequence.

The most common Fibonacci retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels are derived by calculating the vertical distance between the high and the low and multiplying the result by the ratios of 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

Each of these levels represents a potential point of support or resistance. A retracement that is shallow (i.e., less than 38.2%) suggests that the trend is strong, while a retracement that is deep (i.e., greater than 61.8%) suggests that the trend is weak.

The Fibonacci retracement tool is simple to use and can be applied to a variety of markets, including stocks, forex, and cryptocurrencies. Here are the steps to follow:

1. Identify a swing high and a swing low in the market. A swing high is the highest point reached in a trend, while a swing low is the lowest point reached.
2. Click on the Fibonacci retracement tool in your trading platform and draw a line from the swing low to the swing high.
3. The Fibonacci retracement levels will automatically appear on the chart.
4. Look for price action at each level to determine if it is acting as support or resistance.
5. Place a trade if the price bounces off a level.

It is important to note that Fibonacci retracements should never be used in isolation. Always combine this tool with other trading strategies and indicators to increase your chances of success.

## Tips for Using Fibonacci Retracement

1. Use Fibonacci retracements on higher time frames to identify long-term support and resistance levels.
2. Combine Fibonacci retracements with other technical indicators such as moving averages, RSI, and MACD to confirm signals.
3. Look for confluence between Fibonacci levels and other support and resistance levels such as trendlines, horizontal support and resistance levels, and Fibonacci extensions.
4. Fibonacci retracements work best in trending markets. Do not use them in choppy, sideways markets.

## Conclusion

The Fibonacci retracement tool is a popular and effective tool for identifying potential levels of support and resistance in trading. By understanding how to use the Fibonacci retracement levels, you can improve your trading success and make more informed trading decisions. Always remember to use this tool in conjunction with other trading strategies and indicators, and to keep an eye on other support and resistance levels for the best results.

Still, have no trading account yet? Open an account at one of my trusted brokers suitable for algorithmic trading completely for free and start testing today!

This post contains affiliate links. If you use these links to register at one of the trusted brokers, I may earn a commission. This helps me to create more free content for you. Thanks!