{"id":9465,"date":"2022-04-21T18:50:38","date_gmt":"2022-04-21T22:50:38","guid":{"rendered":"https:\/\/optimusfutures.com\/tradeblog\/?p=9465"},"modified":"2022-04-21T18:50:38","modified_gmt":"2022-04-21T22:50:38","slug":"how-to-trade-futures-with-fibonacci","status":"publish","type":"post","link":"https:\/\/optimusfutures.com\/blog\/how-to-trade-futures-with-fibonacci\/","title":{"rendered":"How to Trade Futures with Fibonacci | A Complete Guide"},"content":{"rendered":"

This article on Fibonacci Trading is the opinion of Optimus Futures.<\/strong><\/p>\n

\"Fibonacci<\/a><\/p>\n

What Is Fibonacci Trading?<\/h2>\n

If you\u2019ve spent enough time in the active trading world, the name \u201cFibonacci\u201d will likely have come up several times. There are quite a few trading indicators, techniques, and strategies named after this 13th-century Italian mathematician.<\/p>\n

Although Fibonacci himself had nothing to do with these trading approaches, the approaches derive from a few of his concepts; most having to do with his unique form of measurement.<\/p>\n

So, to answer the question posed in the title, Fibonacci trading is a trading strategy that employs the use of Fibonacci ratios<\/strong>. Overall, the application may seem pretty basic, but if you look at the market from a \u201cFib\u201d perspective, you might find that Fibonacci ratios can often be quite helpful and effective.<\/p>\n

So, here\u2019s how we\u2019re going to tackle this topic. First, we\u2019re going to explain the basics of Fibonacci ratios and how to interpret them. Next, we\u2019re going to cover a few Fibonacci trading strategies so that you can see how they work in a market context.<\/p>\n

Let\u2019s start with the first set of questions: what\u2019s a Fibonacci ratio and how is it used in a trading context?<\/p>\n

Fibonacci Ratios in a Trading Context<\/h2>\n

Before we begin, it\u2019s important for you to know that Fibonacci concepts can lead to several applications across multiple domains.<\/p>\n

We\u2019re going to avoid this \u201crabbit hole\u201d since it\u2019s beyond our purposes. For this introduction, let\u2019s focus mainly on two things: how Fibonacci numbers work<\/strong>, and how the ratios are used in trading<\/strong>.<\/p>\n

A Fibonacci number sequence<\/strong> is one that produces a number from adding the last two numbers before it: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on to infinity.<\/p>\n

\"Fibonacci<\/a><\/p>\n

Source: Wikipedia<\/a><\/p>\n

What\u2019s interesting about Fibonacci ratios is that they can be found in nature, from the smallest building blocks of the universe to the largest celestial bodies.<\/p>\n

Here\u2019s a graphic representation of the Fibonacci spiral that\u2019s characteristic of many shapes in nature.<\/p>\n

\"Fibonacci<\/a><\/p>\n

Source: Wikipedia<\/a><\/p>\n

Do you see seashell shapes, patterns on plants, and countless others that exhibit this golden ratio<\/a>? What about this example\u2026<\/p>\n

\"Golden<\/a><\/p>\n

Source: Wikipedia<\/a><\/p>\n

If you take this sequence and break it down into ratios, you will come across the numbers that are used in a technical trading context.<\/p>\n

Some traders say that it can be used to unlock potential moves in the financial markets.<\/p>\n

Whether this is true or not, enough technical traders<\/a> respond to Fibs frequently enough that it has become either a self-fulfilling prophecy or a practical framework for timing market entries and exits.<\/p>\n

Here\u2019s the Fibonacci ratio sequence<\/strong>: 23.6%, 38.2%, 50%, 61.8%, 78.6%, 100%, 161.8%, 261.8%, 423.6%<\/p>\n

Note that 50% is not part of the Fibonacci sequence<\/strong>, but in trading, it\u2019s often appended to this sequence for reasons we\u2019ll explain later.<\/em><\/p>\n

Okay, so how do you use them?<\/h3>\n

Two words: retracements and extensions. A retracement is the same as a pullback. It\u2019s what happens when the price reverses from its current direction.<\/p>\n

An extension is a projection of where the price might<\/em> go once it pulls back and then heads back in the original direction, going past its previous \u201cswing high.\u201d<\/p>\n

This can sound confusing, so let\u2019s break it all down starting with retracements.<\/p>\n

How Do Fibonacci Retracements Work?<\/h2>\n

Note: Fibonacci retracements can be applied to prices moving higher and lower; to bullish and bearish market scenarios.<\/p>\n

We\u2019re going to approach this article from a bullish perspective to simplify things. If you\u2019re looking to apply these concepts to a bearish scenario, then you will have to reverse the concepts.<\/p>\n

Fibonacci retracements <\/strong>measure the ratio of a pullback.<\/p><\/blockquote>\n

Let\u2019s suppose the price of an asset moves from a low point to a high point.<\/p>\n

\"Price<\/a><\/p>\n

Once the price reverses, it\u2019s considered a pullback, or a \u201cretracement.\u201d<\/p>\n

\"Price<\/a><\/p>\n

Now, let\u2019s suppose you want to enter a position in the market, add to an existing long position, or place a stop loss<\/a> somewhere in the retracement.<\/p>\n

The big question is WHERE IN THE RETRACEMENT MIGHT BE A FAVORABLE BUY POINT OR SELL POINT?<\/p>\n

That\u2019s where Fibs come in handy. Take a look at the image below.<\/p>\n

\"Fibonacci<\/a><\/p>\n

The image illustrates the common buy and sell points using Fib retracements. But why at those price levels? The answer is much simpler than you\u2019d expect, and we\u2019ll cover it later in this series.<\/p>\n

For now, just note how difficult it might be to pinpoint these same entries and exit points without the use of Fibonacci\u2019s ratio series.<\/p>\n

Disclaimer: \u00a0The placement of contingent orders by you or broker, or trading advisor, such as a \u201cstop-loss” or \u201cstop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.<\/p>\n

 <\/p>\n

How Do Fibonacci Extensions Work?<\/h2>\n

Going back to the last image we looked at, let\u2019s suppose the price goes past the previous swing high.<\/p>\n

\"Price<\/a><\/p>\n

How high might you expect the price to go before taking profit? What are a few strategic price levels that can help you make that decision?<\/p>\n

Fibonacci extensions might help you here.<\/p>\n

\"Fibonacci<\/a><\/p>\n

The 138% and 161% levels are among the two most commonly used extensions for taking a profit. There\u2019s no hard rule for these levels.<\/p>\n

If you have other technical or fundamental reasons why you might want to take profits at a higher or lower level, then by all means use your judgment.<\/p>\n

If anything at all, these Fib extensions<\/strong> can help provide you with a reference point <\/em>to decide where you might want to close your positions.<\/p><\/blockquote>\n

We\u2019ll cover these in a strategy context in a separate article.<\/p>\n

Fibonacci Ratios in Trading<\/h2>\n

For now, you should have a clear idea of how Fibonacci ratios are commonly used in trading:<\/p>\n

They help you identify potentially favorable entry and exit points by measuring a retracement or by projecting a measured extension<\/strong>.<\/p><\/blockquote>\n

Now, on to a more detailed explanation of how to interpret Fib retracements.<\/p>\n

How to Interpret Fibonacci Levels<\/h2>\n

When an asset price retraces, we can measure the pullback using these Fibonacci levels.<\/p>\n

\"Interpret<\/a><\/p>\n

But the three critical Fib retracements are 38.2%, 50%, and 61.8% (see boldface above). Why these levels? Perhaps an anecdotal approach might be the most effective way to explain how to interpret these levels.<\/p>\n

Let\u2019s put ourselves in the mind of three traders:<\/p>\n