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What is Fibonacci and How Do You Use It to Trade?

Fibonacci Indicator - Official Olymp Trade Blog

Fibonacci was an Italian mathematician who examined a specific number sequence. That sequence, considered to have correspondence to the “golden ratio” and observed in many spheres of nature, has eventually found many practical applications. Trading is one of them, and this article shows how you can use Fibonacci indicators as a technical analysis tool.

Contents:

Interact with the dashed word and green spot on images to get additional details and explanations.

Fibonacci Levels Indicator

What are Fibonacci Levels and What are They Used For?

Fibonacci Levels is one of the two Fibonacci indicators available on the Olymp Trade platform.

Visually, it is represented by a set of parallel horizontal lines located at different distances.

AUD/CAD chart - Olymp Trade Blog - 01.03.2022
Fig. 1. Fibonacci Levels charted on the AUD/CAD graph

How to Chart Fibonacci Levels on the Screen

To apply Fibonacci Levels on the chart, click the compass sign in the bottom-left corner of the screen to open the Technical Analysis tools. Then choose Fibonacci Levels from the Indicators list in the sidebar.

AUD/CAD chart - Olymp Trade - Blog - 01.03.2022
Fig. 2. Fibonacci Levels indicator in the Indicators menu of the Olymp Trade platform

Once the Fibonacci Levels appear on your screen, adjust the span and direction of the indicator by dragging the corners of the indicator’s area left-right and up-down. The green diagonal that crosses the entire indicator’s area should coincide with the direction of the trend you are applying it to.

In the case of an uptrend like in the image below, match the bottom-left corner of the indicator with the low and the top-right corner of the indicator with the high.

AUD/CAD chart - Olymp Trade - Blog - 01.03.2022
Fig. 3. Fibonacci Levels charted on the AUD/CAD graph and oriented upwards

With a downtrend, match the top-left corner of the indicator with the high and the bottom-right corner with the low.

GBP/CHF chart - Olymp Trade - Blog - 01.03.2022
Fig. 4. Fibonacci Levels charted on the GBP/CHF graph and oriented downwards

All the inner levels of the indicator will be automatically reconfigured as you adjust it.

What Do the Lines of Fibonacci Levels Mean?

The lines of the Fibonacci Levels present levels where the price may reverse or accelerate.

The baseline of the Fibonacci Level corresponds to 0% as it is the starting point of the indicator’s charting. The upside of the indicator is the 100% level. Between these two, there are inner lines. Their percentages reflect their position on the way from 0% to 100% of the Fibonacci Levels and serve to distinguish them from each other.

In application to price forecasting, each of the inner lines may either be an important level or an auxiliary level.

If it’s an important level, then it is expected to produce a signal of higher reliability than that of the auxiliary. Here is the table that reflects where each line stands in terms of this distinction.

LevelImportance
1 (or 100%)the endpoint of calculations
0.618 (or 61.8%)an important level
0.5 (or 50%)an important level
0.382 (or 38.2%)an auxiliary level
0.236 (or 23.6%)an auxiliary level
0 (0%)the starting point of calculations

Generally, breaking out of the 0.5 level is considered as one of the most reliable signals for trend reversal. Similar logic may be applied to other important levels.

Fibonacci Fan Indicator

The Fibonacci Fan indicator appears as a set of rays that all start at the bottom-left point and expand to the right at various angles.

EUR/JPY chart - Olymp Trade - Blog - 01.03.2022
Fig. 5. Fibonacci Fan Levels charted on the EUR/JPY graph

Similar to the Fibonacci Levels indicator, once you chart it on the screen, you can move it around by dragging the starting point and the upper ray that defines the span of the indicator. The rays are automatically reconfigured as you adjust the indicator up to your requirements.

Which Time Frames are Best for Using Fibonacci Indicators?

While technically any time frame is suitable for the Fibonacci indicators, experienced traders often prefer the 5m time frame for intraday trading and a 4h time frame for long-term positions.

What Can I Combine with Fibonacci?

Here are the tools that you can use together with the Fibonacci indicators to maximize the overall efficiency of forecasting trends, find optimal market entry points, and reduce risks.

  • Oscillators. If the Fibonacci Levels or rays are giving a buy signal, it may be confirmed by an oscillator such as RSI if it is in the oversold zone.
  • Support/Resistance Levels. Very often, if the price goes below the ray of the Fibonacci fan, it is a buy signal. This signal may be double-confirmed if there is a horizontal support level in the vicinity of the current price.
  • Both scenarios presented above may be applied together in combination with Fibonacci indicators.
Try Trading with Fibonacci

Risk warning: The content of the article does not constitute investment advice and you are solely responsible for your trading activity and/or trading results.