Fibonacci levels are one of the most reliable technical analysis tools that are used to detect hidden resistance / support levels and other important market boundaries. They are mainly the basis of strategies based on price pullbacks.
To find these hidden levels, knowledge of Fibonacci numbers, tools that connect price highs and lows on the chart, and simple calculations are enough.
Fibonacci numbers are a sequence constructed in a special way: starting with the sum of two units, each next number is the sum of the last two members of the sequence. Thus, the following series of numbers is obtained: 2, 3, 5, etc., which has remarkable properties. In particular, we are talking about the ratio of the "golden section", which is reflected not only in art, but has become indispensable for trading in the foreign exchange market.
Fibonacci numbers connect important relationships with which you can predict the interaction between the trend and the counter-tendency of price movement.
Fibonacci retracement levels of 0.38 (38%), 0.5 (50%) and 0.62 (62%) are also calculated based on the Fibonacci numbers. The price after its movement is adjusted according to these percentages, which helps to predict Fibonacci levels to which the counter trend of the main trend can penetrate.
Fibonacci numbers also help determine how far the price is able to move in search of new extremes until the flat zone completes the current trend in the market. It is through these hidden points that resistance / support levels will pass: the price will either fluctuate on them, or it will turn in the opposite direction from them.
Fibonacci trading is greatly simplified through the use of modern tools used for technical analysis. There was a time when swing traders had to calculate rollback levels using a calculator, and then manually enter them into a computer. Currently, most graphic programs contain a set of tools that allow literally in a split second to do all the required mathematical calculations.
In particular, in the MT terminal, the Fibonacci retracement grid is set by simple tension using the Fibonacci Lines tool. Options for its construction differ depending on the goals.
Determination of correction depth
Fibonacci levels to determine the end of the correction are obtained by tensioning the grid, which completely covers the impulse movement from its beginning to the end of the wave. In this case, the following line values will become the strongest of the resistance / support levels: 38.2 (38%), 50 (50%) and 61.8 (62%). Profits are recorded on them if the trade (despite the fact that it is very dangerous) is conducted against the trend or the market is entered on the trend, say, using a pending order.
Identification of potential goals
To determine where the price may rush, the grid is stretched the other way around: from the end of the movement to its beginning. Usually in this case, these are the levels of 161.8 (162%), 261.8 (262%) and, possibly, even 423.6 (424%). This is especially true for currency pairs with high volatility, which are able to cover significant distances. These values should be taken into account for profit taking in trade.
Using these indicators, important technical levels are determined. Each trader decides how to use them. For example, it places pending orders on them , for some it is the level of stop loss, while others take profits.
Fibonacci levels are a significant reference point for almost any trader, which means that significant volumes of trade are accumulated on them. That is why even in the case when the Fibonacci sequence does not work out completely, the influence of the masses “makes” the levels work.