Fibonacci Trading Strategy: What Is It & How Does It Work?

Leonardo da Pisa once described the Fibonacci numbers. Today Fibonacci sequences are used in a wide variety of areas. You can also work with these numbers when trading. Switchere explains the Fibonacci strategy.

In the area of ​​trading, there are some trading strategies that are designed to help traders achieve maximum success. The Fibonacci strategy is based on the Fibonacci numbers. These start with 0 and 1, from then the next Fibonacci number is the sum of the two previous numbers. Fibonacci numbers also appear in other contexts in mathematics. For example in connection with the golden ratio or the sum of diagonals in Pascal’s triangle. The Fibonacci numbers are also found frequently in nature.

The numbers have been known since ancient times. At the beginning of the 13th century, the most important mathematician of the Middle Ages, Leonardo da Pisa, described the Fibonacci numbers. The name of the numbers is based on the nickname of Leonardo da Pisas — Fibonacci. Now the Fibonacci numbers aren’t only represented in nature, but can also be used as a trading strategy on the stock exchange.

How to Find the Fibonacci Numbers?

If you want to include the Fibonacci strategy into everyday trading, you should know how the Fibonacci numbers are determined. To determine the sequence of numbers, two numbers are always added together. The Fibonacci number sequence starts with 0 and 1. Accordingly, the next number is 1 again, because 0 + 1 = 1. If we then go one step further, we have 0, 1, 1, i.e. 1 + 1 = 2. So the next number in the sequence is 2. It goes on like this 0, 1, 1, 2, 3 (1 + 2), 5 (2 + 3), 8 (3 + 5), 13 (5 + 8) , 21 (8 + 13), … The quotients are gradually moving closer to the golden ratio, which some people sure know from mathematics and nature.

In order to get ahead with the Fibonacci strategy, one must know the structure of the Fibonacci number series. Because then you can completely lose yourself in the world of Fibonacci numbers. Some Fibonacci levels are relevant for Fibonacci trading. For example there are levels 0; 38.2%; 50%; 62.8% and 1. 

If you go a step further, you can also add the Fibonacci levels 23.6% and 76.4%. These levels result from dividing two consecutive numbers — provided you use the larger numbers for the calculation in order to get as close as possible to the golden ratio. It’s precisely these Fibonacci levels that are used to assess the prices.

The Fibonacci Strategy in Trading

When it comes to trading, many users rely on trading strategies that have already been extensively tested and found to be positive. Because without a sensible trading strategy, you often lose track of your own assets or let yourself be guided by emotions. This approach has little to do with calculation and accordingly all profits are pure coincidence. If you want to approach trading with a little more sense and understanding, then you should start to deal with the different trading strategies. 

This will help you to know yourself better as a trader. In the end, you will usually find one, two, or three trading strategies that perfectly match your own ideas. One of these trading strategies could be the Fibonacci strategy. 

If you’re interested in the Fibonacci strategy, feel free to let us know in the comments!

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