The Fibonacci number sequence and golden ratio can be found throughout nature and traders such as Gann applied them to the financial markets and made millions using this unique tool as part of their trading methodology.
The Fibonacci number sequence and golden ratio used by many savvy traders today as we look at how they can make big gains in all financial markets.
Support and resistance is important for all players who can help identify entry and exit points when trading.
Fibonacci percentage "retracement" derived from the Fibonacci number sequence and golden ratio is an innovative and useful tool for all traders, so why are they so useful.
Let us find out.
Fibonacci Numbers and Golden Ratio Applied To Trading
The Fibonacci sequence was printed in the Liber Abaci, written by Leonardo Fibonacci in 1202. It introduced Hindu-Arabic to Europe for the first time and they replaced Roman numerals.
The Fibonacci number sequence was based around the following equation:
How many couple of rabbits can be generated from a single pair, if each month each pair produces a new pair, which, from the second month starts producing more rabbits?
While the Fibonacci number sequence and golden ratio has been used to solve the above equation.
The result was:
It produced a number sequence that has importance throughout the physical world.
After the first numbers in a row, the relationship between any number in relation to the next higher number is approximately, 618 and the lower figure is 1618.
These two values is known as the golden mean or golden ratio.
The golden mean and the Golden Ratio
These figures are pleasing to us and appears throughout biology, art, music, weather, creatures and architecture.
Examples of physical properties based on the Golden Ratio is:
Snail shells, galaxies, hurricanes, DNA molecules, sunflowers and many more items that occur in the physical world.
Retracement Levels
The two Fibonacci percentage retracement levels considered the most critical of the players is: 38.2% and 62.8%.
Other important retracement percentages: 75%, 50% and 33%.
So how can traders use them?
Well, there are three main advantages and they are:
1. Fibonacci numbers Define exit numbers
If three or more Fibonacci price levels collected a stop loss can be placed over the area that shows an important area of support or resistance.
Setting stop loss trades using Fibonacci retracements allow players to set pre-defined basis of so they can disappear from the market on their errors.
This means that they can act in a disciplined manner and protect their capital, which is essential for all traders.
2. Fibonacci levels can define the position size
Depending on the risk a trader wants to take on a trade Fibonacci numbers can give the size of position on the risk the trader wishes to adopt.
Why?
This is simply for the monetary loss from the stop to the trade is different to most positions in the market.
A stop near resistance and support may mean that a higher position than one where support or resistance away.
Traders can therefore determine the position size in their money management parameters easily and have a predefined exit point.
3. Fibonacci Numbers & Results per Trade
With Fibonacci numbers, once a pattern completes against a Fibonacci price area traders can use them to lock in profits.
This indication of how far a gain in May term, allows traders to lock in profits on pre-established levels.
The advantage of the Fibonacci number sequence is a predictive tool:
So, make it possible for traders to have a specific stop loss and profit targets in advance.
Operators can then use them to lock in more profits and reduce losses to a minimum, which is essential for long-term profitability.
Gann used them for this purpose and that is why they are a useful tool for traders
One of the keys to trading on any market discipline:
In order to reduce losses and run profits and win in the long term by trading without emotions.
Gann knew this and all the players who have committed knows how feelings can ruin a trading plan and the Fibonacci number sequence is a professional stay disciplined.
Do they work?
Gann understood using Fibonacci numbers could make large profits and reduce losses on his trades and he used them to amass a fortune of over $ 50 million.
Fibonacci numbers are useful, but should be used as part of a trading portfolio and Gann, for example, not just rely on them, he had a series of innovative tools that he combined to make fantastic profits.
He was one of the most successful players of all time and his legend lives on and many skilled players around the world still use his methods
Check them and you might be glad you did.
Not only are they innovative, they can give you big profit potential and that is what we all want as traders.
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