What is Fibonacci Retracement? How to use Fibonacci Retracement in Trading? Explained By CA Rachana
Summary
TLDRIn this video, CA Rachana Ranade introduces the concept of Fibonacci retracement in technical analysis, a tool used to predict stock market reversals. She explains the Fibonacci sequence and its prevalence in nature, then connects it to financial markets, demonstrating how retracement levels can estimate potential reversal points. Rachana also shares a personal trading example, illustrating the practical application of Fibonacci ratios for profit. The video is an engaging tutorial on a key technical analysis tool, with a call to action for further learning.
Takeaways
- 🔢 13 divided by 21, 34 divided by 55, and 89 divided by 144 all yield the same result.
- 📉 The concept of Fibonacci retracement is used in technical analysis for stock markets.
- 📜 Fibonacci sequence was introduced to the West by Leonardo of Pisa in 1202.
- 🔢 Fibonacci numbers are natural numbers starting with 0 and 1, and each subsequent number is the sum of the previous two.
- 🌸 Fibonacci numbers appear in nature, such as in the number of petals on flowers and the structure of pineapples.
- 📈 Fibonacci retracement helps determine potential reversal levels in stock market trends.
- 📏 The golden ratio, also known as PHI, is approximately 0.618 and is derived from Fibonacci numbers.
- 📊 To use Fibonacci retracement, you divide a chosen Fibonacci number by itself and other preceding numbers to get specific ratios (1, 0.618, 0.382, 0.236).
- 🔄 In stock market terms, retracement is a temporary reversal in the direction of the market trend.
- 💡 Fibonacci retracement levels help predict up to which point a market might retrace before continuing in the original direction.
Q & A
What is the common answer to the divisions 13/21, 34/55, and 89/144?
-The common answer to these divisions is approximately 0.618, which is known as the golden ratio.
Who introduced the Fibonacci sequence to the West?
-The Fibonacci sequence was introduced to the West by Leonardo of Pisa, also known as Fibonacci, in 1202.
What are the first two Fibonacci numbers?
-The first two Fibonacci numbers are 0 and 1.
How are Fibonacci numbers calculated?
-Fibonacci numbers are calculated by adding the current number to the previous number in the sequence. For example, 0 + 1 = 1, 1 + 1 = 2, 2 + 1 = 3, and so on.
Where can Fibonacci numbers be found in nature?
-Fibonacci numbers can be found in various natural phenomena, such as the number of petals on flowers and the arrangement of cones in a pineapple.
What is the golden ratio and how is it related to Fibonacci numbers?
-The golden ratio, approximately 0.618, is found by dividing a Fibonacci number by the next number in the sequence. For example, 55 divided by 89 equals approximately 0.618.
How is the golden ratio used in stock market analysis?
-The golden ratio is used in stock market analysis to calculate retracement levels, which help predict how far a stock price might move during a correction or retracement.
What is a retracement in stock market terms?
-A retracement in stock market terms is a temporary reversal in the direction of a stock's price, either moving upwards during a downward trend or downwards during an upward trend.
How can Fibonacci retracement levels help in trading decisions?
-Fibonacci retracement levels can help traders determine potential reversal points in the market, allowing them to make informed decisions about when to enter or exit trades.
What website does the speaker recommend for practicing Fibonacci retracement?
-The speaker recommends using the website indottradingview.com for practicing Fibonacci retracement.
Outlines
🔢 Exploring the Fibonacci Sequence in Stock Markets
The speaker introduces the concept of the Fibonacci sequence through a series of division examples, highlighting the consistency in the results. This leads to the revelation that these ratios, surprisingly, play a significant role in stock market analysis, specifically in Fibonacci retracement. The Fibonacci sequence, historically rooted in ancient Indian mathematics and popularized in the West by Leonardo of Pisa, showcases how naturally occurring sequences are used to predict stock market behaviors.
✨ Understanding the Golden Ratio (PHI) and Its Applications
This section delves into the golden ratio, known as PHI, explaining how it is derived from the Fibonacci sequence. The golden ratio appears in various natural phenomena, from flower petals to rabbit breeding cycles. The speaker illustrates how to calculate the golden ratio using Fibonacci numbers and explains its pervasive presence in nature, emphasizing its potential applicability to the stock market for predicting retracement levels.
📉 How to Use Fibonacci Retracement in Trading
Here, the speaker shifts focus to the practical application of the Fibonacci sequence in stock trading, specifically through Fibonacci retracement. The concept of retracement is explained as a movement against the current market trend, either upward or downward. The speaker demonstrates how Fibonacci levels help predict the extent of market corrections and shares a personal trading example using these levels. The importance of identifying the highest and lowest points on a chart to draw Fibonacci retracement levels is emphasized, highlighting the effectiveness of this tool in making profitable trading decisions.
Mindmap
Keywords
💡Fibonacci Retracement
💡Technical Analysis
💡Golden Ratio
💡Fibonacci Numbers
💡Retracement
💡Stock Market
💡INDOT Trading View
💡Candlestick Chart
💡Nifty 50
💡Futures Contract
Highlights
Introduction of a mathematical curiosity where 13 divided by 21, 34 divided by 55, and 89 divided by 144 all result in the same answer, setting the stage for a discussion on Fibonacci retracement.
Introduction to the concept of Fibonacci retracement as a tool in technical analysis of stock markets.
Historical background of the Fibonacci sequence, originating from Indian mathematicians and popularized in the West by Leonardo of Pisa, known as Fibonacci.
Explanation of the Fibonacci sequence generation through the addition of the current number to the previous one.
Fibonacci numbers' prevalence in nature, such as the arrangement of petals in flowers and the pattern of pineapple cones.
The concept of retracement in stock markets, defined as a temporary reversal of market direction.
Introduction of the golden ratio, PHI, and the relation to Fibonacci numbers.
Transcripts
Let me ask you few quick questions to begin our video, ok. How much is 13 divided by 21? Check
out for yourself. Next, how much is 34 divided by 55? One more, how much is 89 divided by 144,
and if you have checked out on your calculator, you will understand that,
the answer for all these three questions is the same. Is this magic? What is it?
Hi guys CA Rachana Ranade here, and I welcome you all to my lecture series on technical analysis.
I'm sure by now the excitement already might have begun to build in, wherein you might be really
curious to know, as to how come the answers came same, and, am I going to teach you mathematics,
or am I going to teach you something about stock markets? The answer is very obvious,
it's about stock markets. It's an amazing thing which we learn during technical analysis, and this
is known as Fibonacci retracement. If you want to know more, let's check it out in the next section.
Okay, Fibonacci sequence, it was 1300 years ago that mathematicians in India had actually talked
about this concept. It was introduced in the West in one, in 1202 basically by Leonardo of Pisa,
Fibonacci, which was a mathematician. Now let's understand what is the the main logic behind
these Fibonacci numbers. They are said to be natural numbers, and what do you mean by natural
numbers? 0 and 1 are the very base Fibonacci numbers. Now how is it done? Just check this out,
0 1 are the basic two numbers. Then we say 0 plus 1 is 1, 1 plus 1 is 2, 2 plus 1 is 3,
3 plus 2 is 5, 5 plus 3 is 8, 8 plus 5 is 13, and so on and so forth. So, have you understood what
I did? I did nothing, but I added the current number with the previous number. I hope we have
understood, how the Fibonacci numbers go ahead. These Fibonacci numbers, believe it or not,
come in very much natural sequence. What do I mean? These Fibonacci numbers are found in
petals of flowers. So, majority of the flowers will have either three, five, or eight petals,
but you won't find a flower which will have, number of petals, which are not a Fibonacci
number. In fact, the cones in a pineapple also follow the Fibonacci sequence. Uh, there are many
more reference, about even breeding cycles of rabbits, which also follow a Fibonacci
sequence. I know it's very hard to believe, but yes that's how a Fibonacci number sequence, can
be found in nature as well. Now there were many people, who said that if it is found in nature,
then why can't this same logic be followed in the stock market, and this same logic was
brought into the stock market, wherein we try to calculate the retracement levels, but what's the
retracement? What is the golden ratio, is what we are going to check out in the next section?
Now, let's talk about the golden ratio, which is also called as PHI. This PHI was divided, was
actually invented by the Greeks. The name PHI was invented by Greeks, but very commonly it is known
as the golden ratio. You can see all the numbers on the screen, which are the Fibonacci numbers, 1,
2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, so on, so forth. By now you have understood how these
numbers were calculated, right. Now the question is what is golden ratio? So, what you have to do
is, you have to divide 21 by 89, or let me start off in a very simple manner. Choose any number,
I'll tell you step by step. Choose any number, okay. Assume that we have chosen 89. Now step
number one, that number divided by the same number 89, divided by 89, and answer is going to be one
intelligent huh! Now, what you have to do? You have to divide one number, which is immediately
previous to that number. So, which was the number immediately previous to 89, which is 55. So now
you do 55 divided by 89. You get the ratio of 0.61, correct. Then skip one number, and then take
the previous number. What, we skip 55, we take 34. So, 34 by 89, and what do we get? 0.38, okay. Now
skip two numbers in between. Which numbers did we skip? 55 and 34. So, now, we do 21 by 89. Right,
and what do we get? We get 0.23. You can follow this exercise for any damn Fibonacci number. Take
the number divided by itself, answer is going to be 1. Divide the immediate previous number by that
number which you have chosen. Your answer is going to be same, which will be 0.61. Skip that number,
take 1 number before that, divided by the number that you have chosen. Your answer is going to be
0.38. Skip 2 numbers in between, Take the next one, your answer is going to be 0.23,
and this is called as a golden ratio. Believe it or not this golden ratio is found again at
many places. In fact, it is said that even our height, total height, divided by the height of
our feet till the navel, also follows the golden ratio. It's amazing to know about how golden ratio
exists in nature, and now the big question. How can I use this golden ratio?
Now, let's come to the most important part, as to how I can draw this Fibonacci retracement?
but before we go to Fibonacci retracement drawing part, we must understand the meaning
of Fibonacci and retracement. Fibonacci is what? Fibonacci is nothing but the number sequence,
and I told you about the mathematician who, whose name was Fibonacci, and that is why Fibonacci,
otherwise there's no meaning. What do you mean by retracement? Retracement is nothing but if
there is a specific direction going against the direction, is retracement. In stock market terms,
if market is on a downward trend, then going from downward to upward is known as a retracement.
Oppositely if mark, in the reverse way if market is in the uptrend and if market were to go down
then it will be known as a retracement on the downside. Ok till here, question is that if market
is falling, and if we feel that oh, this might be the point from which markets might retrace,
might go up. The big question is, to go up till which level? and this level can actually be
determined by Fibonacci numbers. This is amazing, and this is how I have taken a trade. I am going
to show you the evidences, as well, how I took a trade? At what level I took a trade? At what
level I squared off? and why did I choose that level to quit my position? That was absolutely
based on one thing, and that is Fibonacci numbers. So again, one more time, what is
retracement? If markets are in a downward trend, we feel that market might reverse. Retracement,
Fibonacci retracement tells us, as to till what it will retrace, till what level it will go up, okay.
So downward to upward retracement and if markets is is currently in the upward trend? Question is
if it were to go down, till what level? That is again told by Fibonacci retracement, okay. So,
let's come to INDOT training view, there is a website for you to understand it clearly. Let
me show up the screen for you. INDOT trading view. That's a free website, by the way. So,
indottradingview.com, is the name of the website. This is not a sponsored video; this is a site
which I use often. You can definitely use it too. What, so what you have to do is,
just search nifty here, that's why nifty 50 chart came up. Then go to full-featured chart. So, as
I mentioned how can Fibonacci retracement help me to take a decision? Right now if you can see here,
I will show you how to draw it. Also I'm deleting this one. Can you tell me which trend is this?
This is clear-cut downtrend. By the way I've already made a video on a poor trend, downward
trend, and sideways trend. You can check that out as well. So this this was a very clear downtrend,
and your you can easily see a Morningstar candle, right. If you want to know more about
what's a Morningstar, please let me know in the comment section, and I would be happy to make a
separate video on that. So, a question is now how to draw a Fibonacci retracement level. So,
it's very simple here you can see on the extreme left side, something like a Trishul, and I'm I
just clicked on that, and here you can see fib retracement. I'm clicking on that, now what you
do is, you take the highest point, okay, take the highest point and you join it. I'm just clicking
on this. Join it to the lowest point. This is the lowest point that you can see, right. There are
theories here, some people say you should touch the body of the candle, some people say you should
touch the wick of the candle. By the way, what is body of a candle? What is wick of the candle?
Everything has been explained in one of my basic lectures on technical analysis as well. So, right,
now what does this signify? This signifies, now can you see these these numbers 0.23, 0.38, 0.5,
0.61, 0.78, see 0.5, just like a halfway level. So, ignore that for the time being. 0.23, 0.38,
0.5, 0.61, 0.78, what is that? That's a golden ratio, yes. So, now what does it say? If markets
are in a downward trend, at some point, it will reverse, okay. Could be for a temporary phase,
but it will reverse. Question is, reverse till what, till what level? So, what I had done is,
I had taken a trade here, after I could see the Morningstar candle, and today,
that is absolutely like within 24 hours, I squared off my position with a big big profit, and what
level did I place my order is a big question now. See here you can see that the level, for 0.23, 23
percent is 8662. So, ideally, this should be the level at which the market should again retrace,
okay. So maximum it will retrace from here till, 23.6 percent. So, I put a square off order at
8600, and guess what? I booked an amazing profit. Could the market have bounced till 38 percent as
well? Answer is probably yes, possibly yes, but as on the date when I'm recording the video,
this is today, that is 26th of March, is when I'm recording the video so I don't know what happens
tomorrow. I feel that the markets might go down, but again that's my feeling. I might be correct, I
might be wrong, but at least I'm happy. I was able to take an amazing trade with the help of only
and only Fibonacci retracement. If you want to know more about Fibonacci retracement in detail,
I do have a separate lecture series on technical analysis. You can check that check that out on my
website. Which you can see right in front of you. Do consider subscribing to this course. I'm sure
it'll be of great help to you. Here you can see on the screen, that's a contract note, and here
you can see that I had bought nifty April Series on 25th, that is yesterday, at a future price
of 8292, and here you can see my today’s trade wherein I squared off at 8600. Now, do you want
to know how much profit is that? You can calculate it by yourself. What you'll have to do is my
selling price is eight six zero zero - minus my buying price is eight- two- nine - two, correct?
So that is three hundred and eight, but nifty lot size is not one, It is obviously 75. So the
profit amount comes out to twenty-three thousand one hundred. Not bad, isn't it less than 24 hours,
why not? That's the magic of technical analysis. That's the magic of Fibonacci retracement. I
hope you have enjoyed today's content. It was my pleasure to present to you the Fibonacci
retracement. It's one of my favorite tools of technical analysis. This is the first video that
I am recording from home. I don't have a green screen here, I don't have my regular recording
team with me. I have a new crew in my recording team. If you can please come here to show who
recorded this entire video? A very special guest, who who helped me to record this entire lecture.
Thank you for being patient and what are you doing? I hope you have enjoyed today's video.
Please consider subscribing to my channel. That's it from my side for the day, bye bye
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