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Fibonacci and How to Use Them Week 1…

This week in pip academy, we look at the Fibonacci.

This week, we will give the basics of the Fibonacci and in the following weeks we will build on the Fibonacci into extensions fans and reverse fans.

The Fibonacci is made up of the Fibonacci sequence that takes a zero and a 1 and then begins to add them and we add each new number to the last number to get the next number/ The sequence is 0,1,1,2,3,5,8,13,21,34,55,89 etc. where each number is getting larger. Dividing any two sequential numbers such as 55/89 or 21/34 and we get 61.8%. Dividing alternating numbers such as 21/55 or 34/89 and we get 38.2%. Add 50% representing symmetry and we have our 3 Fibonacci numbers for a Retracement or a Fibonacci Fan.

On of the first methods we use with the Fibonacci is the retracement. We watch for price to create a trend and we anchor the Fibonacci Retracement from the low to the high. After price has reached the high, we watch for price to pull back and to close between the 38 % and 61% Fibonacci levels. When price pulls back this far, we watch for a break above the 38% level to return to the resistance level or 0% Fibonacci level. If price breaks below the 61% level, then we watch for price to fall to the support or 100% Fibonacci level.

We can develop this pull back and return to the highs or lows as a system. If we set buy orders above the 38% level and sell orders to short below the 61% level and place the stop at the 50% level when this occurs, we have a 3 to 1 reward risk ratio. The distance between 38% and 0% is 38% and the distance between 38% and 50% is approximately 12% giving us a reward risk rato of about 3.2:1 but we don’t expect to get in to the trade exactly at the Fibonacci level so we round down and assume a 3:1 Reward Risk Ratio. The distance between the 61% and the 100% level and the 50% stop gives us the same 3:1 Reward Risk Ratio. With a 3:! RR you only have to be right 1 for ever 4 times to break even.

Note in the chart below how price established a trend and retraced between the 38% and 61%. When this happens, one could set a buy stop above the 38% and below the 61% level and place the stop at the 50% for both bullish and bearish trades. When price hits the 0 or 100% we get limited out and watch for a new trade.


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