Trading with Fibonacci ratios is often incorporated into the trading plans of many commodity traders to some degree. Carolyn Boroden, who is dubbed the “Fibonacci Queen”, trades almost exclusively with the use of Fibonacci numbers, ratios and time series. Fibonacci Trading – How to Master the Time and Price Advantage outlines the trading strategies you can use with Fibonacci’s and how you can incorporate them into your trading plan.
What are Fibonacci Numbers?
You will find that the Golden Ratio of 1.618 is found throughout the series. You can take any two consecutive numbers in the series after the first few and you will find the Golden Ratio. (For example, 233 x 1.618 = 377). The inverse of 1.618 is 0.618, which you will find very useful in trading.
Using Fibonacci Numbers in Trading Commodities
To calculate a retracement, you would take the length of the previous low to high move (in uptrends) and multiply it by all the ratios and plot the lines on a chart. Most charting software programs already have built in features to do this. Carolyn Boroden also uses Fibonacci price extensions to project how far a market might rally as it resumes the trend.
Once you run the retracements and extensions, you should have a chart with multiple lines showing the various levels of potential support or resistance. You want to look for clusters where three or more levels overlap. This should increase your odds of the commodity reversing from that level.
Adding Fibonacci Time Ratios
Again, you want to look for clusters of time zones where several time periods overlap within a day or so. The author states that your probabilities of success increase greatly when a commodity runs into a cluster of Fibonacci price levels at the same time it hits a cluster of Fibonacci time ratios. You should look for a market to reverse its previous direction as it hits these levels.
Not a Foolproof Trading Method
I like how the author clearly states that this stuff doesn’t work all the time – as no trading method works all the time. But you do increase your odds if you find a cluster of these price levels. Nobody really knows if Fibonacci ratios sometime work because they are somehow tied to the natural rhythm of the markets or enough traders use them to move the markets.
