In this report, we will look at the history and background of the Fibonacci numbers and the golden ratio. Then we’ll describe three specific money management tips that can help you increase your earning potential.
Support and resistance levels are an important consideration for most traders to help identify entry and exit points when trading.
Fibonacci percentage “retracement” levels based on the Fibonacci number sequence and the golden ratio are very popular with many traders, but what exactly are they?
What are the Fibonacci numbers and the golden ratio?
The Fibonacci sequence first appeared as the solution to a problem in Liber Abaci, a book written by Leonardo Fibonacci in 1202 to introduce the Hindu Arabic numerals used today in a Europe that still uses Roman numerals.
The original Liber Abaci problem posed the question: How many pairs of rabbits can be generated from a single pair, if every month each mature pair gives birth to a new pair, which, starting in the second month, becomes productive?
the golden ratio
After the first few numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately 0.618, and the lower number is 1.618. These two figures are the golden mean or the golden ratio.
Its proportions are pleasing to the human senses and it appears in biology, art, music and architecture. Some examples of natural shapes based on the golden ratio include DNA molecules, sunflowers, snails, galaxies, and hurricanes.
Important retracement levels
The two Fibonacci percentage retracement levels considered the most important in trading are 38.2% and 62.8%. Other important pullback percentages include 75%, 50%, and 33%.
Three Profit Tips for Using Fibonacci Numbers
1. Fibonacci defines Stop Loss levels
A trader can use Fibonacci numbers to set stop loss orders.
For example, if at least three Fibonacci price levels come together in a relatively tight zone, you can set a stop loss placement just below or above the zone.
A Fibonacci number helps define stops as follows, if a trader trades against a support zone, if the support zone is breached and the price trades below that zone, the reason for the trade is negative and the position should be closed.
Setting stops using Fibonacci retracements takes the emotion out of trading and provides a predefined exit point.
2. Fibonacci defines the size of the position
Depending on the risk you are willing to take per trade, the Fibonacci numbers can also define the size of the position. For example, if prices are right at a specific level, you may want to take more positions than if the price is further away.
3.Fibonacci defines objectives
With Fibonacci numbers, once a pattern completes against a Fibonacci price zone, you can use them to set take profit targets to accumulate partial profits or adjust stop loss levels. This clear objective for traders helps them to secure profits.
The great advantage of Fibonacci numbers and the golden ratio is the fact that they take the emotion out of trading and can define not only stop losses to exit a market, but also set profit targets.
WD Gann and Fibonacci – the perfect trading combination!
One trader who incorporated the Fibonacci numbers and the golden ratio into his trading was the legendary trader WD Gann.
We believe that using Fibonacci numbers with the Gann trading method provides traders with the best possible combination for seeking long-term trading profits.