Fibonacci levels. How to draw and correctly apply the instrument

Fibonacci levels are a classic instrument of technical analysis that designed to measure price fluctuations based on Fibonacci sequence. Users draw this instrument manually. Traders often use Fibonacci levels as resistance and support lines, as well as for finding profitable points of opening trading positions and completing trades.

Fibonacci instrument consists of several horizontal lines is levels. Distance between the graphic instrument elements is determined in percentages and is automatically calculated according to sequence of Fibonacci numbers.

Fibonacci lines on chart

How to draw Fibonacci lines on a price chart

Trader needs to perform following actions to draw Fibonacci lines on chart:

  1. select a timeframe (suitable parameter is 4 hours or more);
  2. determine a clear upward or downward trend;
  3. click on graphic instruments icon in the trading room of broker;
  4. select Fibonacci lines from the list;

Steps for applying Fibonacci lines on chart

  1. when is uptrend: needs to click left mouse button on beginning of trend and move the pointer to top point of tendency (the button needs to be held);
  2. when is downtrend: needs to click left mouse button on its top of trend and move the pointer to bottom point of tendency (the button needs to be held).

Users must apply Fibonacci levels to graph from right to left. That is main feature of drawing an instrument at IQ Option platform. But in popular trade terminals the instrument is usually built from left to right.

Applying of Fibonacci lines in an uptrend or a downtrend

User has option of editing the graphic parameters of instrument, i.e. he can select the convenient thickness and colour of lines, when the Fibonacci levels are plotted on graph.

How to apply Fibonacci lines to trading

The Fibonacci tool is most effective when adjusting the price after trend in trading. Depending on the price movement the levels: 23.6%, 38.2%, 50%, 61.8% perform function of resistance and support lines, at which price can change the motion vector.

Fibonacci lines as support and resistance levels

Traders often use levels: 23.6%; 38.2%.  On these Fibonacci lines can open trading positions or place pending orders for the purchase or sale of assets. Since price chart often changes the direction of traffic at the levels of 23.6%; 38.2%.

Example of a simple deal with a Fibonacci instrument on historical prices

Trader must put the Fibonacci levels on the chart once the uptrend has peaked and weakened.

User needs to open a long position, when the price will approach to 38.2% mark and close the deal when the price be return to 23.6% mark.

The example shows that the deal can be repeated at least twice, but with the Fibonacci instrument it is better to work once. One applying of Fibonacci levels – one transaction. Trader needs to re-do all the actions for appropriate situation to again apply the instrument.

Summary

In the article general positions and principles of Fibonacci lines application are considered. Trading only with this graphical instrument is a rarity. Because traders mainly use it as an additional instrument for determining points of opening and closing trading positions. The ability to use Fibonacci levels is another useful skill of a successful trader.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future

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