Fibonacci Levels: how to build and successfully apply in trading?

How to determine where the price will go during a correction or growth? Fibonacci levels will help us solve this problem – a graphical analysis tool based on the Fibonacci sequence. Thanks to its convenience and ease of understanding, Fibonacci retracement is used in many trading strategies and employed by the majority of traders.

Principles of Fibonacci Sequence Formation

Fibonacci (Leonardo of Pisa) – the first prominent European mathematician who was involved in the practical study of achievements made by Indian mathematicians in Arabic mathematics. Fibonacci's contribution lies in popularizing the positional numeral system, which is more convenient for counting than the Roman numeral system.

The Fibonacci sequence is a series of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. The main dependence for the formation of the sequence is that each subsequent number in the sequence is obtained by adding the previous two numbers.

The Fibonacci sequence has a significant physical, psychological, and even aesthetic meaning. The thing is that humans are attracted to objects that possess proper forms. But how can we understand the beauty of an object using mathematics? It's simple: the ratio of its sides should approach the golden ratio – 1.618!

The point is that the ratio of each number in the sequence to the previous one approaches the golden ratio of 1.618. Moreover, the further the number is in the sequence from the beginning, the better this ratio is:

34:21 = 1.619;

55:34 = 1.617;

…

610:377 = 1.618.

There are a few more remarkable mathematical properties of the Fibonacci sequence:

each number in the sequence is equal to 0.618 of the subsequent number (34 = 55 * 0.618);
each number in the sequence is equal to 0.382 of the number after the next (21 = 55 * 0.382);
each number in the sequence is equal to 0.236 of the number two steps ahead (13 = 55 * 0.236).

Based on these properties, Fibonacci levels are constructed.

Principles of Fibonacci Retracement

There are two types of market situations where Fibonacci retracement can be applied:

In the case of an upward correction: There is an ascending trend, and you need to determine the levels at which the price may retrace for position accumulation, as well as the levels at which you will exit your long positions.
In the case of a downward correction: There is a descending trend, and you identify the levels of potential price "bounces" to enter short positions and understand the area for position exits.

Remember: Fibonacci retracement is always constructed based on the trend!

So, it's worth remembering the following scheme:

We build an upward correction from the low (i.e., the starting point of the trend, which is the minimum price) to the high (i.e., the maximum price where the correction began);
We build a downward correction in the opposite direction, from the high (the starting point of the downward trend when the decline just started) to the low (the minimum price when the bounce started).

Low and high levels are determined by shadows, not the bodies of candlesticks!

Let's consider an upward correction:

Fibonacci Retracement in an Upward Correction

As we can see, there is a strong bullish trend (identified by the moving average). Buying prevails, and we want to enter a long position. We place the 1.0 Fibonacci level at the minimum point and the 0.0 level at the potential high. If the maximum keeps updating, we adjust this level until the correction begins.

When the correction starts, we begin accumulating positions with a grid of orders at levels 0.382, 0.5, 0.618, and 0.786. Profit-taking is done beyond the 0 level, depending on the analysis of additional tools and your trading strategy. A stop-loss is placed beyond the 1 level, i.e., beyond the previous low.

The final movement results in an 86% profit from the entry point:

Application of Multiple Fibonacci Grids in Long Trades

However, it is clear that capturing the entire movement is impossible. Therefore, it is easier to trade with several "Fibs" while considering the condition for the completion of the correction (the price reaches the 0.5 - 0.618 levels):

Principles of Using Multiple Fibonacci Grids

You can also trade local Fibs within a larger Fibonacci grid. In this case, you determine the main Fib for the entire movement on a larger timeframe, such as 4 hours or 1 day, and local Fibs on smaller timeframes, like 15 minutes and 1 hour.

It's better to make multiple trades with reasonable profits than one trade with overly ambitious targets.

For a downward correction, the process is similar, but the Fibonacci grid is extended from the high to the low:

Fibonacci Retracement in a Downward Correction

Entering short positions occurs when the fundamental factors in the market favor selling, meaning that bullish sentiment has turned bearish. You can assess this based on fundamental news, Bitcoin's behavior, volume analysis, and overall trends using moving averages. If the price is below the moving average and selling prevails in the market, then focus only on short trades.

When entering short trades based on a downward correction, positions are also accumulated at Fibonacci levels, and profit targets are set beyond the 0 level, relying on the hope that the previous high will be broken. In this case, I also recommend trading with multiple Fibs simultaneously: one global and local ones on smaller timeframes. This way, your cumulative profit will be higher.

Important note! Fibonacci retracement levels are considered as support and resistance levels that interact with the price of an asset. If a Fibonacci level coincides with a support/resistance level, it is very significant and confirms the correctness of your analysis and conclusions.

How to Set Up Fibonacci Retracement in TradingView?

In TradingView, Fibonacci retracement is represented by the Fib Retracement tool , which is located in the "Gann and Fibonacci Tools" section:

Fibonacci Retracement Tool in TradingView

You can also take the straightforward approach and press the Alt + F key combination to select the desired tool.

After enabling Fibonacci retracement, simply select the start and end points:

Conclusion

A few concluding notes:

Fibonacci retracement levels are used to determine levels of upward and downward corrections.
With the help of the Fib Retracement tool, you can identify price ranges for position accumulation and exits.
A Fibonacci grid is always constructed based on the trend. It is impossible to place a grid "in thin air" by saying "it looks fine to me";)
The start and end points of the grid should align with the shadows of the candlesticks.
It's great when Fibonacci levels coincide with support and resistance levels.
Fibonacci retracement should only be applied in strongly defined trends. It is not useful in narrow sideways movements.