In this guide, we provide an overview of how to use the Fibonacci sequence in your trading.

## What is the Fibonacci Sequence?

Leonardo Fibonacci was an Italian mathematician that is famous for writing about the ‘Rabbit puzzle’ in 1202, which tried to determine how many rabbits would there be in a year. In Fibonacci’s investigation of the problem, he stumbled across what is known as the Fibonacci sequence:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, …, ∞

This mathematical sequence of numbers is a close approximation of how many rabbits there will be after a year if you start with a pair. Each number in the sequence is known as a Fibonacci number.

The sequence doesn’t just describe the rate at which rabbits reproduce, but also many other natural phenomena. For example, the arrangement of seeds or petals on a flower head or the arrangement of leaves on a plant.

By taking the ratio of two successive Fibonacci numbers, the ratio eventually settles at 1.618034, which is known as phi (or the Golden Ratio). Phi is also found extensively across nature, for example, the proportions of the bodies of animals, plants and humans often display the golden ratio.

Since the market is a collection of individuals, the market also exhibits Fibonacci numbers and the golden ratio in particular ways.

The price of an asset like bitcoin never just goes straight up or straight down. Instead, there is an ebb and flow found within a trend, with prices rising then retracing slightly, following another rally and so on in an uptrend. This is where Fibonacci numbers and the golden ratio are useful, since we can use them to obtain retracement levels and extension levels that frequently align with low and high points in the price of an asset.

## How to Use the Fibonacci Retracement Tool

The first and simplest way to use Fibonacci numbers in your trading is the Fibonacci retracement tool.

First, identify the swing high and swing low points. There are several ways to do this, for instance, you could use two consecutive fractals in opposite directions (read more about fractals here), which is a way to identify an Elliot Wave.

To select the Fibonacci tool, click on the blue button on the trading chart panel and select ‘Gann and Fibonacci tools’. From this menu, click on ‘Fib retracement’.

You will then be able to draw the Fibonacci retracement levels on the chart, aligning the 0% and 100% levels with the swing high and swing low points respectively.

Once you’ve drawn the Fib retracement levels, you can use the options button to align the Fib tool with the swing low and swing high points.

In the example above, the Fibonacci tool is aligned with the two consecutive fractals. Remember, a fractal is formed two days after a high or low and no new high (or low) is made. So on June 19, we would have observed a fractal and used the Fib tool to get ready to enter the market.

At this point, a break above the 100% level of the Fibonacci tool at $9,475.00 would motivate a buy order, targeting one of the extension levels. Alternatively, you could sell at one of the extension levels and set a limit order once the price breaks above the 100% Fib level.

Alternatively, a break below the 78.6% retracement level at $9,054.50 would motivate a sell order and target one of the lower Fibonacci levels (usually the 61.8%, 50% or 38.2%) levels or wait for a test of these lower Fibonacci levels to enter a long position.

Extending the chart, we see that on June 20, the market broke above the 100% Fibonacci level and closed above $9,475.00, providing a signal to buy BTC-PER and target the 161.8% Fibonacci extension level at $10,690.00. Alternatively, you can target the higher extension levels as well, partially closing your position as the 1st extension level is hit and closing the entire position once the second extension level is hit.

Notice how the 1st extension level acted as resistance on June 22-23, with the price failing to close above $10,690. However, the trend continued and reached the 2nd extension level at $12,656.00.

The market peaked below the 3rd extension level and the large upper wick and following red candle indicated weakness of bulls at this point, signalling to enter short positions and target the support levels highlighted by the Fibonacci tool. For instance, the large downward move on June 27 failed to break the 1st extension, which then acted as support.

The Fibonacci tool is useful because moves can play out over a long time and still respect these Fibonacci levels. Notice how the wicks of the candlesticks often align with the Fibonacci levels outlined below.

For instance, strong support is indicated at the 100% level up into August. Also, we see that the 2nd extension level was rejected twice, once in late June and once in mid-July. The test in mid-July should have motivated a short position since the price failed to stay above this level previously on higher volume.

Elliot Waves can be identified with the help of the Fibonacci tool and other indicators, for instance, certain waves start at certain Fibonacci retracement levels or end at certain Fibonacci extensions. E.g., a wave 3 in Elliot Waves will always target the 1st and 2nd Fib extensions of wave 1. Wave 2 will bounce off X and & Fibonacci retracements.

## Fibonacci Time Zones

Instead of applying the golden ratio to price action, you can also apply it to the time dimension. Known as Fibonacci Time Zones, this tool is drawn on a major swing high or swing low point and displays vertical lines based on Fibonacci numbers.

As with Fibonacci retracements, you can use fractals to identify swing high or swing low points. For example, the Fibonacci time zone is aligned with the fractal low on April 24th and the fractal high on May 15th and the next line appears 21 trading sessions after May 15th.

Looking at the chart below, we see on the third Fibonacci time zone was closely aligned with a fractal low at $7,427, being just two days out from predicting a significant low. Also, another fractal low was posted three days after the third Fibonacci time zone.

The next Fibonacci time zone predicted a significant high or low for June 26th, the day after bitcoin reached its 2019 high near $13,900. And the next time zone predicted a significant low or high for August 7th while the market posted a fractal high two days prior. The time zone at August 7th aligned with a Doji candlestick, after which the price entered a downtrend.

The example above demonstrates that Fibonacci time zones are good at approximating highs and lows in the market, but do not give 100 percent exact timings. The downside of these time zones is that the starting point can be very subjective.

There are many other tools that use the Fibonacci sequence, including Fibonacci arcs, channels, trend based extensions and spirals.