Let me simplify it for you: understanding the Fibonacci sequence and its math isn’t as complicated as some make it out to be. Basically, it’s a series of numbers where, after 0 and 1, each number is the total of the two before it:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610….
Our guy, Leonardo Pisano Bogollo, a math genius from Italy, introduced the Fibonacci sequence back in the 13th century. The connections between these numbers are what make Fibonacci numbers key for trading. Can you see the simplicity and elegance?
This Fibonacci indicator? It’s all the rage in trading circles, and why? Well, it helps forecast when a correction is about to finish or when a trend might change direction.
Check it out, you can find the Fibonacci Indicator in the terminal from Pocket Option. Just click the Pencil icon, like in the screenshot below:
A Little History
Fibonacci—he's our Italian math mastermind, born in Pisa around 1170. This guy figured out the benefits of the Hindu-Arabic numeral system and spread the word across Europe by 1202.
Now, don’t forget about the Golden Ratio, which is about 1.618, also known as Phi. This ratio shows up all over the place—nature, architecture, fine art, you name it. Think of the Parthenon, Leonardo’s Mona Lisa, or even the spirals of galaxies.
How to Use Fibonacci Levels in the Financial Markets
You take the high and low points on your chart and apply those key Fibonacci ratios of 23.6%, 38.2%, and 61.8%. You’re creating a grid that displays Fibonacci retracement levels; those horizontal lines help you spot potential price reversal points.
The trading chart is your guide. Prices don’t just keep surging up or down; corrections are unavoidable.
So, once the trend starts to show signs of weakening and you see a couple of candles change direction, that’s your cue to pull up the Fibonacci levels.
Now, you’ll see levels like: 0; 0.236; 0.382; 0.5; 0.681; 0.764; and 1. I suggest setting these levels with the current trend—check out the screenshot below:
These Fibonacci retracements? They’re great for trend strategies. What we do is look for a retracement and find low-risk entries heading back in the direction of the trend, based on those Fibonacci levels. The idea is that prices are likely to bounce back from these levels and continue in the original direction.
Want to adjust the scale? Just click and drag one of those white dots where you need it.
Let’s lay down some guidelines:
- When the trend is rising, level 0 starts at the bottom, and 1 ends at the peak.
- If it’s a downtrend, flip that: level 0 caps off the top, and level 1 starts at the bottom.
How to Trade with Fibonacci Levels?
This indicator signals when corrections are finishing up and the trend is set to change. So, it’s a clear choice to buy at the end of a rollback.
Keep in mind, the 1.618 number is the star of Fibonacci. That’s the backbone of the top Fibonacci extension level—161.8%.
During an uptrend, traders jump in at point B for that ‘bounce’ and measure that retracement A to B to see how far the move can go before it hits point C—the 161.8% level.
Conversely, in a downtrend, you’re stepping into that ‘correction’ at point B and doing the same measurement to check how far we can go before reaching point C—the 161.8% level.
Now, for those counter-trend traders, you can keep an eye on that 161.8% level for potential trades against the trend, but let’s be honest, that’s more suited for the experienced ones.
If you see a bounce off this line towards the trend, it’s your cue that the correction has ended and we’re back on track.
- Buy a Put Option
- Buy a Call Option
If you notice a level breaking through followed by a rollback, it’s a red flag—might be a good idea to hold off on any purchases.
Traders often wait for level 1 breakdowns to trigger signals. If there’s been a bounce off 0.618 and the price keeps moving in that direction, and your trade finishes up before hitting level 1, just relax for a bit. But if it breaks down, go ahead and snag another option in that same direction.
At this point, you’re in the know about how Fibonacci retracement levels are your best pals for identifying support and resistance to jump into trades with the trend. And Fibonacci extension levels? They clue you in on how far a trend might run before flipping back, also acting as exit signals.
The Pocket Option trading platform is your playground for a multi-asset trading experience, filled with tools, timeframes, and strategies. To dive into the entire suite of Fibonacci indicators and stick with real-life trading examples in upcoming sections, start off with a free demo account.
