What are Fibonacci Retracements

[Music] hello and welcome to this week's strategy video with me David Jones and trading 2 & 2 now there's been quite a few requests for what we're going to cover this week and we're doing the subject of Fibonacci retracements now I have to start off by saying I am NOT a big fan of Fibonacci retracements I don't believe they work but but what do I know so what we're going to do we'll go through the theory and look at it in a real market and you can make up your own mind so mr. Fibonacci was an 11th century mathematician came up with the Fibonacci sequence which we'll see in a second and the argument that the Fibonacci fans would use is that you see these Fibonacci numbers occur everywhere in nature for example the shape of the galaxy is a Fibonacci logarithmic spiral this is the same for the shape of a snail's shell you can figure out the number of petals on a flower and how branches grow it's all determined by Fibonacci so the argument is well Fibonacci occurs everywhere in nature there's no reason why we can't apply it to market so I'll let you make up your own minds but first of all let's take a look at the theory behind Fibonacci retracements so mister Fibonacci our 11th century mathematician came up with the Fibonacci series of numbers so here we go 1 1 then 1 plus 1 is 2 2 plus 1 is 3 3 plus 2 is 5 5 plus 3 is 8 8 plus 5 13 13 and 8 21 21 Oh 13 34 and so it goes on so we have our Fibonacci sequence of numbers where every number in the series is the previous two added together so these numbers then have certain properties for example and once we get past one at the beginning any number divided by the next number along the result tends towards gets closer and closer to naught point six one eight any number divided by the number two along let's say eight divided by 21 in this example the number the result gets closer to noir point three eight two then any number let's take eight divided by the number three along the number the result will get closer and closer to nor point two three six so these are some of the values of the Fibonacci numbers then right at the beginning we have 1 divided by 2 the result is clearly nor point 5 so we have these various calculations that come from Fibonacci numbers and what Chartists do is convert these to percentages so 23.6 becomes or twenty three point two three six becomes twenty three point six percent then we have 50 percent thirty eight point two percent and 61.8% okay so those for a charting point of view these are important Fibonacci retracements so let's see how this actually works let's look at the theory so I'm going to clear the screen and we'll start with a theoretical marking so I've written the numbers down here as a reminder so let's say a market is moving higher doing this and then start selling off fans of Fibonacci we'll use Fibonacci retracements to try and figure out how far back is this market going to fall before it resumes its trends and they'll say they might take the move from here to here so let's say that is I don't know a hundred points move to the market read a hundred points when the markets drop back twenty three point six percent of that move that's the first Fibonacci retracement level so they look to see if the market holds there if the market breaks the next level there look at is 38.2% if it breaks that level they look to see if the market holds at the 50% level when it's dropped back fifty percent of that rise and the final Fibonacci level for this example is 61.8% so their way to see what the market does at these levels and the assumption is they're going to be like hidden levels of support in an uptrend or hidden levels of resistance in a downtrend and the thinking is if the market drops back more than 61.8% at the prior move it's going to go all the way back to where the move start okay hopefully you're still awake after their explanation and now what we'll do we'll apply it to a real market and we're going to take a look at Fibonacci retracements on the price of gold so let's take a look at Fibonacci in the real world what we're looking at is gold so I'm going to do a couple of historical examples to show how it might have worked and then a current example on gold so let's pretend it's at the end of February so we're here we watch gold go from the December lows around about eleven hundred and twenty dollars an ounce up as high as here at pitayas a sort of 1260 area recently and it starts to come off do we think right I'm going to use my Fibonacci retracements to try and figure out where the price of gold might stop sliding and bounce and continue this trend so let's put the retracement on so we pick them up from here we start at the beginning of the move so I click down there and then drag it all the way up to the high and it puts the retracement on for me let me just adjust this one down here there we go that's better like a lot of software it does include some additional Fibonacci levels but the main ones I'm worried about let me just make this a bit clearer right click change the color make the lines a bit thicker here we go so what I'm looking at is the 23.6 the 38.2 the 50 and the 60 1.8 so if the Fibonacci is going to work the markets gone up and then we're looking to see if these levels the 23.6 the 38.2 the 50 and the 60 one point eight through they support the market let's just walk through and see what happens next so these are daily candles don't forget so the markets selling off so we're on the twenty three point six level now that's broken it's gone through that so the next one to watch for support is the thirty eight point two at 12:09 that's gone again we can see it breaking through and the next level we're looking at fifty percent and the markets gone from here up to there and now if it gets to this level it's dropped back fifty percent that's our next Fibonacci level so let's just forward and actually it looks like it's working so the market went from X to Y dropped back 50 percent and the market has recovered let's have a look at the next rise what happened next after this the market did push higher up to here just back up near that old high and started coming off again so again let's as usual let's just adjust our lines and we'll pick it off that high there and again we're just trying to see now what happens is that the market hold on these old levels I think it's pushed just a little bit higher so let's just nudge it up to that high up there there we go and it started coming off so our 23.6% level is at 12:54 an ounce on gold then we've got 12 28 and a half that's our 38 percent retracement and then the 50% is there at 1208 and then the 61.8% is a-there 1187 so let's just walk through and see what happens next the market sliding so it's taking out that twenty three point six percent level so thirty eight point two that's the next level to watch it's taken that out and but so far it's holding and once again the 50 percent retracement level has worked so we've took out the first two Fibonacci levels but the market did move higher again okay so now this is an up-to-date chart for gold up until the end of last week - the market had pushed higher beginning of June sold off let's put our Fibonacci levels on let's take him again let's take them again from the start come down here so from those lows in December up to the most recent high beginning of June again I'll right-click make this a different color so we can see it there we go to the market slid off has slid below twenty three point six at the moment it is holding above that 38.2% retracement at 12:00 12:30 ish level and if that level breaks the 50% one to watch out for is twelve ten so there might be a couple of levels if you're a fan of Fibonacci to keep an eye on for gold in the days to come that's it for this week as I say I'm not the biggest fan of Fibonacci but but maybe for you you know it would make a difference for your own trader you can you can try it out obviously on the try platform and see what you think we'll be back in a week's time with another trading strategy video as usual if you're not subscribed click the subscribe button up there to make sure you never miss out on any of these videos in the future if you liked the video just click the thumbs up down below and if you'd like us to cover anything in the future you think we've missed out just leave us a message in those comments down below and I'm sure we'll get around to it but for now for this week we'll leave things there and I hope you have a good trading week

Channel: Trading 212

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Id: Ytr__kKKYBA

Length: 9min 34sec (574 seconds)

Published: Mon Jul 03 2017