3 Simple Fibonacci TradingStrategies [Infographic]More than any other indicator, people place Fibonacci on apedestal in my opinion. At times it feels like traders giveFibonacci an almost mystical power.

At the end of the day, Fibonacci is nothing more than simpleretracement levels. These levels are the only representativeof where a security could have a price reaction, but nothingis etched in stone.

What is the Fibonacci tradingstrategy?In the stock market, the Fibonacci trading strategy tracestrends in stocks. When a stock is trending in one direction,some believe that there will be a pullback, or decline inprices. Fibonacci traders contend a pullback will happen atthe Fibonacci retracement levels of 23.6%, 38.2%, 61.8%, or76.4%. As mentioned below, a pullback is also possible totraders at 50%.

For instance, if GE (NYSE:GE) is selling at $20 and rises to21, the pullback will be 23, 38, 50, 61, or 76 cents.

Some day trading experts see these Fibonacci numbers as ashort-sell strategy. For instance, if GE stock is at $21 andfalls to $20.62, some Fibonacci traders may see the 38 centdrop as a good sign to short the stock. For some traders, theFibonacci retracement is a valid trading strategy to tradestocks. However, Fibonacci numbers aren’t always the bestindicators of a trend.

What do economic experts say aboutFibonacci trading?Chris Svorcik is a forex trader who often uses Fibonaccitrading. He says that traders can use the Fib method, but saysthat they need more experience to master Fibonacci trading.

“I am a huge fan of EW[Elliott Wave, another trading strategy]and Fibs, but it does require some experience to handle it.Using moving averages does in my view shorten the learningcurve. Also using price swings or EW as a support tool ratherthan a main trading tool, I think, makes it less complicated,” said Svorcik.

Daniel Leboe, an analyst with Zach’s, also likes using theFibonacci retracement. However, he also advises caution totraders when using the trading strategy.

“Fibonacci retracement is a good tool to use when deciding ifnow is a good time to buy, but do not look at it as the holygrail. In this volatile market, we are prone to blow throughlevels. Make sure you have a shopping list of stocks you likeready so that you can pull the trigger when the time comes,”said Leboe.

“We are in what I think is one of the best buyingopportunities of our lifetimes. We need to make sure that weplay it right – buy when the market breaks and average downwith small orders,” added Leboe.

“Fibonacci queen” says tradersshould have a plan with tradingstrategyExperienced trader Carolun Boroden trades so often with theFibonacci strategy that she’s been dubbed the “Fibonacci

Queen.” She says that even if traders follow the Fibonaccistrategy, they should still have a specific trading plan.

“You [need] a specific plan that describes what your tradesetups are; how you’re going to get into the trades; what youare going to risk; how you’re going to manage the trade andtake profits; how you’re going to have certain targets, oryou’re going to trail a stop,” said Boroden.

Does the Fibonacci trading strategypredict stock market trends?While some financial experts are skeptical of the Fibonaccistrategy, it has predicted other downturns before. In Februarybefore the COVID-19 crisis, the Dow Jones retraced about 50%before the economic crash. Andrew Adams is a technical analystat Saut Strategy. He wrote in a research note that thepullback at that ratio meant an end to the previous bullmarket.

“Rallies of all sizes do regularly eventually pull back atleast to the 38.2%-50% Fibonacci levels,” wrote Adams.

Not long after that retracement, the bear market devastatedthe stock market.

While the strategy has predicted a bearish market, it can alsopredict a bullish market as well. According to CNBC’s JimCramer, Boroden’s Fibonacci strategy predicted a stock marketrecovery in May.

“The charts, as interpreted by Carolyn Boroden, suggest thatthe major averages are still in rally mode, but it’s aprecarious rally where you need to proceed with caution if wefail to break out from these levels and slip back to where wewere not that long ago,” said Cramer.

“She thinks the S&P is a buy right here. There’s too much

going right in her charts for her to say anything else.However, she says you should be ready to sell if we fail tobreak out over the 200-day moving average, eventually,” addedCramer.

While the Fibonacci trading strategy isn’t exact, if usedcorrectly, it can predict major stock market trends. Thedifferent Fibonacci trending strategies will be explored inthis article.

Fibonacci Trading PersonasBefore we go into the gritty details about Fibonacci tradingstrategies, check out three Fibonacci trading personas andtheir strategies. While fictitious, they do an awesome job ofsummarizing common trading practices.

If you would like to read about the technicals of Fibonaccitrading feel free to skip down to our table of contents below.

But if I can entertain you for just one second, I think it’simportant to think through which persona best fits yourtrading style.

Which Persona Best Describes YouI want you to ask yourself the question of how you plan onleveraging Fibonacci in your trading regimen? If you haven’tdone so already, think about writing a trading plan for you toreview before, during and after the market closes.

I can fluctuate between the low and high volatility Fibonaccitrader depending on what the market is offering. However, asof summer 2018, I find myself gravitating towards the lowvolatility persona. For me, I like to monitor my trade setupand add to positions as they go in my favor.

Fibonacci assists me in seeing these hidden levels of supportand resistance to help me determine my entry and exit targets.

Chapter 1: Origin of the FibonacciSequenceDoes this numbering scheme mean anything to you – 0, 1, 1, 2,3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377? Not really, right?

Well, you are in the right place if it doesn’t. These numbersare the root of one of the most important techniques foridentifying psychological levels in life and in trading.

Behold the mighty Fibonacci ratios!

Hundreds of years ago, an Italian mathematician namedFibonacci described a very important correlation betweennumbers and nature. He introduced a number sequence starting

with two numbers – 0 and 1.

Have a look below, as we build a Fibonacci sequence [1].

Again, we start with 0 and 1.

0, 1

The sequence requires you to add the last two numbers to getthe next number in the sequence. Following this logic, we getthe following equation:

0 + 1 = 1

Now we have our third number in the sequence – 1. See belowfor the updated sequence.

0, 1, 1

Now we add the last number in the sequence to the previousnumber once again:

1 + 1 = 2

We again update our sequence with the number 2.

0, 1, 1, 2

and then…

1 + 2 = 3

and then…

0, 1, 1, 2, 3

and then….

0, 1, 1, 2, 3, 5

and then….

0, 1, 1, 2, 3, 5, 8

and then….

0, 1, 1, 2, 3, 5, 8, 13

This process goes on to infinity.

Chapter 2: Key Fibonacci RatiosFibonacci discovered every number in the sequence isapproximately 61.8% of the next number in the sequence.

55 / 89 = 0.6179775280898876 = 61.8%

233 / 377 = 0.6180371352785146 = 61.8%

144 / 233 = 0.6180257510729614 = 61.8%

This is not the only correlation. Fibonacci also uncoveredthat every number in the sequence is approximately 38.2% ofthe Fibonacci number two steps ahead.

(13, 21, 34)

13 / 34 = 0.3823529411764706 = 38.2%

(21, 34, 55)

21 / 55 = 0.3818181818181818 = 38.2%

(55, 89, 144)

55 / 144 = 0.3819444444444444 = 38.2%

(144, 233, 377)

144 / 377 = 0.3819628647214854 = 38.2%

Also, we have another ratio! Every number in the Fibonaccisequence is 23.6% of the number after the next two numbers inthe sequence:

(55, 89, 144, 233)

55 / 233 = 0.2360515021459227 = 23.6%

Chapter 3: Fibonacci RatiosEverywhere

Fibonacci Sea Shell

The volume of each part of the shell matches exactly theFibonacci numbers sequence. Thus, each part of this shell is61.8% of the next. It works the same way with this aloeflower:

Aloe Flower

If we separate the aloe flower into even particles, followingthe natural curve of the flower, we will get the same 61.8%result.

This ratio is not only found in animals and flowers. Thisratio is literally everywhere around us. It is in thewhirlpool in the sink, in the tornados when looked at throughsatellite in space or in a water spiral.

The Fibonacci ratio is constantly right in front of us and weare subliminally used to it. Thus, the human eye considersobjects based on the Fibonacci ratio as beautiful andattractive.

Also, big corporations like Apple and Toyota have built theirlogos based on the Fibonacci ratio. After all, these are twoof the most attractive and engaging logos in the world.

Still not a believer, check out this study from Harvard’s mathdepartment where they cite a study from Dr. Rowland from

Merrimack College on how to tie knots using Fibonacci [2].

Chapter 4: Fibonacci Ratios inTradingTrading with Fibonacci isn’t complicated.

A logical method for entering a trade is when the stock isgoing through a pullback.

Well, where would you think to place your entry?

Without knowing anything about Fibonacci trading, you wouldlikely say 50%.

That my friend makes you a Fibonacci trader.

That’s what Fibonacci trading is about, understanding stocksdo not move in a linear fashion. Fibonacci helps new tradersunderstand that stocks move in waves and the smaller theretracement, the stronger the trend.

Now, it’s time to take you to the level of an intermediateFibonacci trader. To do this, you need to know the other twocritical levels – 38.2% and 61.8% retracement.

Price action must be analyzed at these levels to understand ifthe countertrend move will stop and the trend will resume.

Fibonacci retracement levels are used by many retail and floor

traders [3], therefore whether you trade using them or not, youshould at least be aware of their existence.

Some advanced traders will take it a step further and addFibonacci arcs and Fibonacci fans to their trading arsenal insearch of an edge.

In full disclosure, I do not use these advanced techniques.The chart becomes too cluttered for me and I get lost in allthe lines.

Chapter 5: How to InterpretFibonacci Levels

Defining the Primary Trend

Strong UptrendDefining the primary trend with Fibonacci requires you tomeasure each pullback of the security. If you see a series ofnew highs with retracements of 50% or less, you are in astrong uptrend.

Strong Uptrend

The above chart is of Alphabet Inc., on a 5-minute chart.Notice how Google does not have any retracement greater than50%. These successive new highs with minor pullbacks are the

sign you are in a strong uptrend.

Choppy MarketHere is another example of a trend with Chipotle (CMG).

Choppy Market

Do you see how each pullback is greater than 78.6%? This levelof retracement repeatedly produces a choppy pattern.Therefore, you would not want to have lofty profit targets ona trade while the stock is in a tight trading range.

78.6% is not a hard-fast rule. If you see retracements of61.8% or 100%, the stock is likely in a basing phase beforethe next move.

That’s it, you now understand how to use Fibonacci to definethe strength in the market.

Remember, the market is either trending or flat.

A general rule of thumb for the overall market is it trends20% of the time and is range bound the other 80%.

Chapter 6: Three Simple FibonacciTrading Strategies

#1 – Pullback TradesFirst, you want to identify a security in a strong trend.

A strong trend can be defined as a stock with successive highswith pullbacks of less than 50%.

If you are day trading, you will want to identify this setupon a 5-minute chart 20 to 30 minutes after the market opens.

After identifying a strong uptrend observe how the stockbehaves around the 38.2% and 50% retracement levels from themorning highs by looking at the time and sales and Level 2.

Once you see the trading activity slowing down or turning,enter the trade.

You can use the most recent high or a Fibonacci extensionlevel as a target point to exit the trade.

Buying Pullbacks

In the above chart, notice how Alteryx stays above the 38.2%retracement level before making a higher high.

Where Can Things Go Wrong?

The chart above looks so clean and safe. The reality is thatyou will likely have a 40%-70% hit rate depending on yourability to honor your rules and manage your emotions.

Therefore, you need to prepare for when things go wrong. In apullback trade, the likely issue will be the stock will notstop where you expect it to. It may pullback to a full 100%retracement, or it could even go negative on the date.

I have had situations trading the Nikkei where a stock willhave a 15% or greater swing from the morning highs.

You can protect yourself from this scenario by doing the

following:

Trade Low Volatility StocksPenny stocks look great when a trader is discussing their 30%gain in one hour. However, it’s brutal if you are on the otherside of the trade. Trade stocks with high volume and somevolatility because we need to make a living, but don’t feellike you must trade with the other gunslingers.

Max Time LossI am always preaching this to anyone that will listen. Lookback over your winning trades and determine how long it takesyou to turn a profit with 85% confidence.

If that is 5 minutes or one hour, this now becomes your timestop. If there is only a 15% chance you will walk away awinner, just exit the trade with a predetermined allowableloss percentage or right at market.

Max Stop LossThere is no way around it, you will have blowup trades. I donot care how good you are, at some point the market will biteyou. To this point, have a max stop loss figure in mind.

For me, it is 10%, but since I only use a small portion of myaccount size, this keeps me under a total portfolio loss of2%. Since I trade lower volatility stocks, this may occur onlyonce or twice a year.

The point is you need to be prepared for the inevitable.

#2 – Breakout TradesBreakout trades have one of the highest failure rates intrading. I’m going to give you a few things you can do to upthe chances of things working out.

Clearing a Fibonacci Extension LevelFibonacci extensions are just that, once price clears the 100%retracement and presses on.

You want to find a stock clearing this extension level withvolume.

Clearing Fibonacci Extension Levels

It’s not enough to just buy the breakout.

Therefore, you want to make sure as the stock is approachingthe breakout level, it has not retraced more than 38.2% of theprior swing. This will increase the odds the stock is set togo higher.

Where Can Things Go WrongIn terms of where things can go wrong, it’s the same as wementioned for pullback trades. The one difference is you areexposed to more risk because the stock could have a deeperretracement since you are buying at the peak or selling at thelow.

So, to mitigate this risk, you will need to use the samemitigation tactics as mentioned for pullback trades.

#3 Trading with Indicators

You can use Fibonacci as a complementary method with yourindicator of choice. Just be careful you do not end up with aspaghetti chart.

Fibonacci Retracement + MACDThis Fibonacci trading strategy includes the assistance of thewell-known MACD. Here we will try to match the moments whenthe price interacts with important Fibonacci levels inconjunction with MACD crosses to identify an entry point.

We hold the stock until we receive a crossover from the MACDin the opposite direction.

Fibonacci MACD

This is the 60-minute chart of Yahoo for the period Sep 25through Nov 3, 2015.

The two green circles on the chart highlight the moments whenthe price bounces from the 23.6% and 38.2% Fibonacci levels.

At the same time, the green circles on the MACD show a crossup of the indicator.

Thus, we go long every time we match a price bounce with abullish MACD crossover.

The red circles show the close signals we receive from theMACD.

We open two long positions with Yahoo and we generate a profitof $5.12 per share.

Fibonacci Retracement + StochasticOscillator + Bill Williams AlligatorIn this Fibonacci trading system, we will try to match bouncesof the price with overbought/oversold signals of thestochastic. When we get these two signals, we will openpositions.

If the price starts trending in our favor, we stay in themarket if the alligator is “eating” and its lines are far fromeach other. When the alligator lines overlap, the alligatorfalls asleep and we exit our position.

Fibonacci Alligator

This is the 30-minute chart of TD Bank for the period Sep 29through Oct 14, 2015.

The price drops to the 61.8% Fibonacci level and startshesitating in the green circle. Meanwhile, the stochasticgives an oversold signal as shown in the other green circle.

This is exactly what we need when the price hits 61.8% and wego long! A few hours later, the price starts moving in ourfavor. At the same time, the alligator begins eating!

We hold our position until the alligator stops eating. Thishappens in the red circle on the chart and we exit our longposition. This trade brought us a total profit of $2.22 pershare.

Fibonacci and VolumeI saved this one for last because it’s my favorite go-to withFibonacci. Volume is honestly the one technical indicator evenfundamentalist are aware of.

Fibonacci and Volume

I mention this a little later in the article when it comes totrading during lunch, but this method works really during anytime of the day.

As a trader when you see the price coming into a Fibonacci

support area the biggest clue you can look to is the volume tosee if that support will hold. Notice how in the above chartthe stock had a number of spikes higher in volume on the moveup, but the pullback to support at the 61.8% retracement sawvolume plummet.

This does not mean people are not interested in the stock, itmeans that there are fewer sellers pushing the price lower.

This is where longs come in and accumulate shares inanticipation for the rally higher.

Chapter 7: Advanced FibonacciTrading Topics

Fibonacci Speed Resistance ArcsFibonacci Arcs are used to analyze the speed and strength ofreversals or corrective movements. To install arcs on yourchart you measure the bottom and the top of the trend with thearcs tool.

The arcs appear as half circles under your trend, which arethe levels of the arc’s distance from the top of the trendwith 23.6%, 38.2%, 50.0%, and 61.8% respectively.

Each of the Fibonacci arcs is a psychological level where theprice might find support or resistance.

This is the 30-minute chart of Apple for the period Oct 26through Nov 3, 2015.

I have placed Fibonacci arcs on a bullish trend of Apple. Thearc we are interested in is portrayed 38.2% distance from thehighest point of the trend.

As you see, when the price starts a reversal, it goes all theway to the 38.2% arc, where it finds support. This is themoment where we should go long.

Lastly, I recommend placing a stop right below the bottomcreated on the arc.

Fibonacci Time ZonesFibonacci time zones are based on the length of time a moveshould take to complete, before a change in trend. You need topick a recent swing low or high as your starting point and theindicator will plot out the additional points based on theFibonacci series.

Notice, in this case, Apple’s price undertakes a move based onFibonacci numbers 0, 1, 2, 3, 5, and 8.

Do you remember when we said that Fibonacci ratios also referto human psychology? This also applies to time as well.

Negatives of Trading with Fibonacci

Increased ExpectationsThe main rub I have with Fibonacci trading is you begin toexpect certain things to happen. For example, if you see anextension as the price target, you can become so locked onthat figure you are unable to close the trade waiting forbigger profits.

If you are trading pullbacks, you may expect things to bounceonly for the stock to head much lower without looking back.

Therefore, if you are trading with Fibonacci at the core ofyour system, expect things not to work out about 40% of thetime.

Take that in for a second. That is quite a bit of times whereyou will be wrong. This means it is absolutely critical youuse proper money management techniques to ensure you protectyour capital when things go wrong.

Closing Too SoonThe other scenario is where you set your profit target at thenext Fibonacci level up, only to see the stock explode rightthrough this resistance. Thus, resulting in you leavingprofits on the table.

Leaving it on the Table

What Are We to Do?Fibonacci will not solve your trading woes. Again, you canhope to be right 60% to 70% of the time. This is not only whenyou enter bad trades, but also exiting too soon.

So, what are we to do?

The answer is to keep placing trades and collecting your datafor each trade. You will have to accept the fact you will notwin on every single trade.

Trading During LunchTalk to any day trader and they will tell you trading duringlunch is the most difficult time of day to master.

The reason lunchtime trading is so challenging is that stockstend to float about with no rhyme or reason. I have seenstocks have 2 to 3 percent range bars with only a few thousandshares traded.

So, how can you profit during the time when others like to getlunch? Simple answer – Fibonacci levels.

What I like to see in the middle of the day setup is apullback to a key Fibonacci support level. For me, that levelis 78.6%.

Again, the reason I like such a deep retracement is if I’mwrong the stock doesn’t have as far to fall.

Ken Chow of Pacific Trading Academy, also mentions the benefit

of a lower-risk entry at the 78.6% level.[4]

However, everyone isn’t as pessimistic as Ken and I, so youcan go with 50% or 61.8%.

Fibonacci Lunch Time Trading

The above chart is of the stock GEVO. Notice how the stockgapped up in the morning and then formed a nice base at the50% retracement level. Now at this point of the day, you wantto see two things happen: (1) volume drop to almost anemiclevels and (2) price stabilize at the Fibonacci level.

The combination of these two things almost guaranteesvolatility also will hit lower levels. You want to see thevolatility drop, so in the event you are wrong, the stock willnot go against you too much.

So, naturally, the question is how do you manage the trade.

First, you want to see the stock base for at least one hour.

Then you want to see higher lows in the tight range. In theGEVO example, you want to place your buy order above the rangewith a stop underneath.

Curious to see what happened?

400 Percent in One Day

Now let me say this may happen once in every 20,000 charts.So, please do not say Al is pushing lunch breakouts that canrun 400%.

I’m just giving you a real-life example that shows the powerof Fibonacci levels providing support during the middle of theday.

Now, remember, you have to exercise extreme caution with themiddle of the day trading.

Not so much from the perspective of the market going againstyou, as you can see you have tight stops.

It’s more around the fact these setups fail a lot.

So, again, keep tight stops and always have realisticexpectations.

ConclusionThe Fibonacci sequence starts from 0; 1, and everynumber thereafter is built by the sum of the previoustwo.Every number in the Fibonacci sequence is 61.8% of thenext number.Numbers in the Fibonacci sequence are 38.2% of thenumber after the next in the sequence.Every number in the Fibonacci sequence is 23.6% of thenumber after the next two numbers in the sequence.The deeper the retracement on a pullback, the lesslikely the stock will break out to new highsFibonacci levels are critical in equity trading becausethey represent a trader’s behavior and psychologicalreaction to price changes.The most common Fibonacci trading instrument is theFibonacci retracement, which is a crucial part of theequity’s technical analysis.Other Fibonacci trading tools are the Fibonacci speedresistance arcs and Fibonacci time zonesWhether you trade pullbacks, breakouts or indicators;you must have a trading plan to manage your position.

Like anything else in life, to get good at something you needto practice. So, if you have a second checkout Tradingsim.com. Here you can practice all of the Fibonacci

trading techniques detailed in this article on over 11,000stocks and top 20 futures contracts for the last 2.5 years.Our customers are able to test out strategies by placingtrades in our market replay tool and not just relying on somecomputer-generated profitability report to tell them whatwould have happened.

As we all know, looking at results of a report and placingtrades are two totally different things!

External ReferencesReich, Dan. The Fibonacci Sequence, Spirals, and the1.Golden Mean. Department of Mathematics, TempleUniversityTwisting with Fibonacci [Study]. Harvard College2.Mathematics Review. p.66Fibonacci Retracement. Wikipedia3.Chow, Ken. Trading with Fibonacci Ratios [Blog Post].4.Pacific Trading Academy

Photo Credit

Aloe Flower

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