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The Fibonacci Tool for Support and Resistance – To use or not to use

Best Binary Options Free Trading Tools  – The Fibonacci Tool

What do Leonardo Pisano Bigollo and Leonardo of Pisa have in common? It’s an easy one: they are different names of one of the coolest dudes to ever roam the Earth, Leonardo Fibonacci. Unfortunately, he died in the year 1250 so no chance for any of us to meet him. Now, you might ask “Why was he so awesome?” It’s a very good question and I’m going to give you 2 good answers. The first one is simple: 0, 1, 2, 3, 4, 5, 6, 7, 8, 9. Yes, we use them every day and life would be hard without them…to say the least. I cannot even begin to state the importance of those numbers, because it’s obvious to all of us. He didn’t invent them, but introduced them to Europe through his book “Liber Abaci” (I don’t know what that means and I haven’t read it so I’m in the dark here). The second reason why he rocks is because of another number sequence called “Fibonacci sequence”. In this sequence, each number is the sum of the two numbers that precede it; it goes like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, etc. Unlike the 0 to 9 numbers which we know how to use, you might wonder what’s the use of the Fibonacci numbers…and when do we get to trading? Ok right, I’m not going to talk anymore about numbers and I’m just going to tell you that through some mathematical formula that divides some of the numbers in the sequence, we get the Fibonacci Retracement, a wonderful tool for identifying levels where the retracement might end in a trend. All you need to do is identify a swing high and a swing low, connect them using the Fibonacci Tool (available in almost all charting platforms) and you will get support and resistance levels just like in my picture below. If we are in an uptrend that is currently retracing, the chances are very high that the retracement will end at one of the Fibonacci levels and we can use a Call, hoping the trend will resume.

 

Why does the Fibonacci Tool suck?

I told you earlier that we must identify a swing high and a swing low. Well, here the discretion of every trader comes into play. I might see the swing high or low differently than a trader living in Binarnia and this will give us different Fibonacci levels. Obviously, one of us will fail; the dreams of wealth and easy life will go up in smoke, the Fib will be thrown away and never used again. If used correctly, this tool can bring lots of profits, but subjectivity is a big drawback. And it has another one: Fib levels are S/R levels and these are bound to fail eventually. Every S/R level will be broken; if that wouldn’t happen, market would just move in a sideway channel.

 

Why doesn’t the Fibonacci Tool suck?

Fibonacci levels are one of the most commonly used technical analysis tools around the world. Due to the multitude of traders using them, the Fibonacci levels become self fulfilling to some extent. If a big enough number of traders trade the same way at a certain level, they will move the market in that direction. To make them even more accurate, you could use them in combination with trend lines: if in a trend price retraces to the trend line and that point happens to coincide with a Fibonacci level, the probability of us making some dough increases dramatically.

 

How to use the Fibonacci Tool

First thing we need to do is identify a swing low and a swing high and then drag with the tool, connecting them both. A swing high is defined by a bar (candle) with at least two bars with lower highs on each side. A swing low is a bar with at least two bars with higher lows on each side. After you connect them using the Fib tool, the levels will appear and all you need to do is trade accordingly. Let’s have a look at the picture:

 

 

Fibonacci levels work best in trending markets because price will most likely find support in an uptrend and resume its climb. In this particular example, we also had additional confirmation from the trend line and the bounce came off the 50% Fib level and off the trend line at the same time – a really good time for a Call. Although it has some drawbacks, the Fibonacci tool is something every trader should keep an eye on, but not rely exclusively on it. Always try to base your trades on more than one tool; try to find the ones that suit you best.

 

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