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Find Market Reversals Using Fibonacci Golden Ratio
Find support & resistance using Fibonacci numbers â
Hey there đđŒ
Today in less than 5 minutes:
1) How to use âmagic numbersâ for trading
2) How to find market reversals with magic numbers
3) What to do when the magic numbers donât work
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Add magic to your trading
0,1,1,2,3,5,8,13,21,34,55,âŠ. 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. Letâs learn more about these series of numbersâŠ
The Fibonacci sequence
Called the Fibonacci sequence, the above numbers are also known as âmagic numbersâ 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, letâs see how â
How to find market reversals with Fibonacci
We will be using TradingViewâs âFibonacci Retracementâ tool for this.
There are several Fibonacci-based indicators freely available on TradingView, one of the worldâs most popular charting and stock-scanning tools. Discover how to make the most of TradingView here.
First, you need to select the âFibonacci Retracementâ option from TradingViewâs panel of tools, under the âFibonacciâ 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 donât respect any of the levels? đ€Ż
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 Budhiaâs Fibonacci Trading Strategy Course. Use code âSTOCK10â & get the course for just âč1,079.
Ask us anything!
Is there anything more you would like to learn about using the Fibonacci numbers for trading? Hit âreplyâ to this email and let us know!
What if the Fibonacci levels donât work?
There may be times when stock prices donât 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 âOption 2â in case the estimated support or resistance doesnât seem right.
Drawing Fibonacci levels on a stockâs RSI
The idea is to draw the Fibonacci retracement on the stockâs 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 instancesâŠ
Finding a stockâs resistance line | Finding a stockâs 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.Â
Learn to use the Fibonacci numbers in channels, moving averages, and more, to improve your trading accuracy in Ms. Jyoti Budhiaâs Fibonacci Trading Strategy Course. Use code âSTOCK10â & get the course for just âč1,079.
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