Anish Singh Thakur talks about Fibonacci and its importance in nature and the stock market. He explains Fibonacci series and retracement tool practically.

Understanding Fibonacci and its Practical Application in Trading

Introduction

Fibonacci numbers and the golden ratio have gained significant attention due to their existence in nature and how they can be applied in different fields, including trading. In this article, we will explore the basics of Fibonacci, its series, and the golden ratio. Also, we will discuss Fibonacci retracements, one of the many tools in technical analysis, and how it can be used to identify potential support and resistance levels in the market using practical examples.

Who was Fibonacci?

Fibonacci, also known as Leonardo Bonacci or Leonardo of Pisa, was a mathematician from Italy during the Middle Ages. He is considered the most talented western mathematician of his time. Fibonacci was responsible for introducing the Fibonacci series, which is a sequence of numbers that starts with 0 and 1 and can be found in nature.

Fibonacci Series and the Golden Ratio

The Fibonacci series is a sequence of numbers that starts with 0 and 1, with each subsequent number in the sequence being the sum of the two preceding numbers. The resulting sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on.

Interestingly, the Fibonacci series can be found in nature, with the number of petals in flowers being a common example. The petals of many plants often follow the Fibonacci sequence, with buttercups having 5 petals, while others have 3, 8, 13, and more. This pattern can be observed in shells, pinecones, sunflowers, and even in the human body.

The ratio of the consecutive Fibonacci numbers approaches the golden ratio, which is approximately 1.618. It is a special number that can be observed in different parts of nature, such as the arrangement of leaves on a stem or the spiral pattern of seashells.

Fibonacci Retracement – Understanding the Tool

Fibonacci retracement is a popular technical analysis tool that helps traders identify potential levels of support and resistance. The tool is based on the Fibonacci series and the golden ratio, and it is used to predict the potential extent of a price correction or retracement in a trending market.

To use the Fibonacci retracement, traders would first identify the trend and then select the lowest point of the trend as the starting point, and the highest point of the trend as the ending point. The tool will then draw multiple horizontal lines across the price chart based on various percentages derived from the Fibonacci series. These percentages include 23.6%, 38.2%, 50%, 61.8%, 78.6%, and 100%.

Traders can use the Fibonacci retracement tool to identify key levels of support and resistance, which can help them determine potential entry and exit points for their trades. The common rule of thumb is that a stock may experience support or resistance around the 38.2%, 50%, and 61.8% levels.

Practical Examples of Fibonacci Retracement in Trading

Let’s take an example, suppose we are analyzing a stock Like Just Dial, which has been moving upwards in a bullish trend. We would like to use Fibonacci retracement to identify potential support levels if the price were to correct downwards.

To begin, we would select the lowest point of the trend as the starting point, like the point where the trend has started to move upward. We would select another point, which is the highest point of the trend or recent swing high. We draw a horizontal line from the low point to the high point.

Next, the Fibonacci retracement tool will reveal horizontal lines at various percentage levels. Now we can examine the levels and use them to identify potential support areas based on the Fibonacci series.

Suppose we start applying Fibonacci retracement in TradingView by clicking the Fibonacci retracement button. After selecting the start and end points, we observe that the stock retraced to 50% which indicates it will have support at this level. We can also see that a candlestick rejected from the 61.8% levels, which could potentially indicate strong resistance in the market.

Conclusion

In conclusion, traders use Fibonacci retracement tool to help identify potential support or resistance areas in a trending market. The tool uses the Fibonacci series and golden ratio to derive levels of support and resistance. These levels are used as potential entry and exit points by traders to help them make informed trading decisions. This illustrates how the Fibonacci sequence and its ratios are not only found in nature but also have practical applications in trading.