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Find Market Reversals Using Fibonacci Golden Ratio
Find support & resistance using Fibonacci numbers →
Hey there 👋🏼
Today in less than 5 minutes:
1) How to use ‘magic numbers’ for trading
2) How to find market reversals with magic numbers
3) What to do when the magic numbers don’t work
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0,1,1,2,3,5,8,13,21,34,55,…. Can you notice the pattern in this sequence?
Each number is a sum of the previous two numbers in the series. For example, 34 = 13+21. Let’s learn more about these series of numbers…
The Fibonacci sequence
Called the Fibonacci sequence, the above numbers are also known as ‘magic numbers’ and are found in many areas of the world like galaxies, sunflowers, the human body, etc.
There exists one more interesting phenomenon - the quotient between each successive pair of Fibonacci numbers approximates 1.618, or its inverse is 0.618. And the inverse between alternate successive pairs is found to be 0.382.
But why are we learning about this as traders?
Because this predictability can be applied to improve the accuracy of trading strategies as well. In fact, these ratios can be used to find potential support and resistance levels while trading, let’s see how ↓
How to find market reversals with Fibonacci
We will be using TradingView’s ‘Fibonacci Retracement’ tool for this.
There are several Fibonacci-based indicators freely available on TradingView, one of the world’s most popular charting and stock-scanning tools. Discover how to make the most of TradingView here.
First, you need to select the ‘Fibonacci Retracement’ option from TradingView’s panel of tools, under the ‘Fibonacci’ tab.
Finding Support1) Draw a line from the most recent swing low to swing high to see the Fibonacci levels. Look at how ACC gave a trend reversal at the 61.8% level. ACC, 1D | Finding Resistance1) Draw a line from the most recent swing high to swing low to see the Fibonacci levels. Look at how BANKNIFTY gave a trend reversal at the 38.2% level. BANKNIFTY, 1D |
The levels of 61.8% and 38.2% are considered optimal for bullish and bearish reversals, respectively. Nevertheless, reversals at alternative Fibonacci levels have been observed historically in numerous indices and stocks.
The Fibonacci levels are very useful in plotting important trend reversal points. But what if stock prices don’t respect any of the levels? 🤯
We have found another way, keep reading!
Learn to use the Fibonacci numbers in channels, moving averages, and more, to improve your trading accuracy in Ms. Jyoti Budhia’s Fibonacci Trading Strategy Course. Use code ‘STOCK10’ & get the course for just ₹1,079.
Ask us anything!
Is there anything more you would like to learn about using the Fibonacci numbers for trading? Hit ‘reply’ to this email and let us know!
What if the Fibonacci levels don’t work?
There may be times when stock prices don’t respect the Fibonacci levels. The prices may take a reversal earlier or later, which may lead to missed opportunities or even losses.
You can find another support level using the Fibonacci though, think of it like an ‘Option 2’ in case the estimated support or resistance doesn’t seem right.
Drawing Fibonacci levels on a stock’s RSI
The idea is to draw the Fibonacci retracement on the stock’s RSI instead of its price. Many times, the stock prices may not fall in line with the Fibonacci levels but its RSI does. We found 2 such instances…
Finding a stock’s resistance line | Finding a stock’s support line |
In both cases mentioned earlier, the prices didn't follow the Fibonacci levels, but their RSIs did, offering a more precise indication of trend reversals.
To sum up,
You can follow this checklist to find a new entry point (support or resistance) in a stock:
1) Draw a Fibonacci retracement from a swing low to its swing high if you want to find a support line.
2) Draw a Fibonacci retracement from a swing high to its swing low if you want to find a resistance line.
3) According to the theory, the trend should reverse at 61.8% (support) or 38.2% (resistance).
4) Simultaneously draw a Fibonacci retracement on the RSI to find an alternate support/resistance level.
Note that it is best to use the Fibonacci retracement complementarily to optimize your entry/exits. It is advised to backtest a technique on a stock before applying it. Find a range of backtested trading strategies here.
Learn to use the Fibonacci numbers in channels, moving averages, and more, to improve your trading accuracy in Ms. Jyoti Budhia’s Fibonacci Trading Strategy Course. Use code ‘STOCK10’ & get the course for just ₹1,079.
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