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There are a lot of tools, indicators and trading weapons out there that will absolutely do the trick in finding you profitable entry or exit positions but for us, the Fibonacci tool is our most widely used and in this guide we’ll show you why. 

The guy who created the Fibonacci sequence, Leonardo Fibonacci was a brilliant mathematician and he discovered a simple series of numbers that created ratios describing the natural proportion of things in our universe. Crazy, right?

This means the numbers that make up Fibonacci on our trading tool, are actually found all throughout the world and our universe, which gives us some confidence in knowing that they are pretty damn important and relevant when it comes to identifying where we place our trades in the markets. 

What are Fibonacci Retracements?

Retracements are short-term price corrections during and overall larger uptrend.  These price corrections are temporary price reversals and do not indicate a change in the direction of the larger trend.

The main benefit of trading retracements is that they provide an opportunity to profit by entering a trade in the original direction of the trend, at a better price, just before the continuation of the move.

They occur when a significant number of traders start to buy as they believe the market price will increase, which pushes the market higher and as more traders notice the movement, they start buying as well.

When the movement has gained traction, some traders will close their positions to take profit at resistance which might result in a temporary sell-off where the market will pull back and the upward momentum will be suspended.

After this, the original forces that formed the trend, resume their activity and the price continues to rise until the trend has run it’s course and reverses, often after hitting the next level of resistance, which we’ll show you below. 

How Do We Know Where to Place Our Fibs?

As we often say, trading is almost like baking a rainbow cake, every layer has to be stacked on top of each other in order to make the overall cake that you see at the end and trading with the fib tool isn’t much different. 

Firstly, we’d suggest drawing in your major and minor levels of support and resistance on your chart before overlaying the fib tool. Is this really necessary? Well, no, but because the accuracy of the fib tool is so great, it’s an excellent way to grade yourself on how well you can draw your levels of support and resistance. 

Second, look at your chart and ask yourself whether the coin you’re charting is in an uptrend or downtrend? This is vitally important that you identify whether you’re in an uptrend or not because it determines how you draw your fibs. 

In short: 

• If your coin is trending upwards – Draw from swing low to swing high

• If your coin is trending down – Draw from swing high to swing low

This is because in an uptrend, we are looking to buy any pullbacks (or long ops) and in a downtrend, we are looking for exit opportunities (or short ops)

Drawing Fib in and Uptrend

IMG: In an uptrend, draw from swing low to swing high to find areas to buy pullbacks

From the image above it’s clear that we are in an overall uptrend and we’ve drawn our fibs from the swing low to swing high,  and we can see where the major pivot areas were (highlighted in orange) and as we’ve topped out now at the new swing high, we are now looking for other major retracement areas where we can load up again (If we continue the overall uptrend.. time will tell on this trade)

The major Fibonacci retracement levels (and where we’d be looking to buy in the chart above) are 38.2%, 50%, 61.8% and although the 50% retracement level is not an actual fib number, it is one that holds strong psychological relevance to traders because it can signify the continuation of a trend once it has passed the 50% level. 

We find that when trading that the 60, 38 and 50 fibs are the most respected major pivot points and while you may find differently, it’s always an idea to back test and see where your fibs showed the best results. 

Note: Fibs are great and all but they are best used in conjunction with other indicators and tools to confirm a trend reversal and fibs work BEST when there is a clear trend present (Upwards or Downwards trend)

Using Fibs With Support and Resistance to Helps Your Trades

In the image above, you can see the power of looking left and including S&R lines on your chart before overlaying the fib tool and how well they line up. Your S&R gives you a great idea of where major pivot levels may lie and paring that with fibs.. chart wizardry ensues. 

What about Trading in a Downtrend?

On the BTC chart below (BTC 1D: Bitstamp), it’s insanely obvious how well the fibs were respected over months of trading. 

We identified our swing high after that massive bullish run and our major swing low. From there we can see that almost ever fib level was respected to some degree where we could have taken profit, or opened short positions with great success. 

Again we can see how the 61 acted as a major pivot point and the heavy sell off after PA passed the 50 fib level before ultimate retracing all the way down to the -27.2 fib level. 

This is before even looking at any indicators or volume! 

How to Place Our Exits..

Your exit strategy is made up of two steps…

1. Deciding where to place your stop loss
2. Where to place your target profit

Note: In a perfect world this would protect our profits, but things don’t always go to plan!

In an upward trend, place your stop loss slightly below the major fib support level. This allows for a little movement on the other side if the candle wicks down past that level. 

In a downward trend, you would place your stop just above the resistance level. 

Where to Find the Fibonacci Extension Tool in Trading View

Thankfully we don’t have to worry ourselves with finding these key fib levels like our friend Leonardo did, instead we just use our trusty Trading View Fibonacci tool and we’re good to go. 

We hope you can see the power of fibonacci by these simple examples and why we use it as a staple of our trades here at Unity Trading Group. 

You might be thinking, “Yeah that’s great, but what about fibonacci extensions!”. We’ll dive into that in our next guide and talk about how you can also use fibonacci extensions with Elliot Waves the predict scarily accurate moves on all you favourite coins

If you have any questions, feel free to join us in our FREE discord server by click below!