What is Fibonacci Retracement? How to use Fibonacci Retracement in Trading? Explained By CA Rachana

Summary

In 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

00:00

🔢 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.

05:01

✨ 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.

10:06

📉 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.

Keywords

💡Fibonacci Retracement

Fibonacci Retracement is a technical analysis tool used by traders to identify potential support and resistance levels in the price of a financial instrument. It is based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones, typically starting with 0 and 1. In the video, the concept is introduced as a method to predict price reversals in the stock market, with the example of dividing numbers like 13 by 21, 34 by 55, and 89 by 144 to illustrate the consistent result of approximately 0.618, which is a key ratio in Fibonacci retracement.

💡Technical Analysis

Technical Analysis refers to the study of historical price patterns and trends in the trading of financial instruments, with the goal of predicting future price movements. In the video, the speaker, CA Rachana Ranade, is introducing a lecture series on this subject, focusing on how patterns identified through technical analysis, such as Fibonacci retracement, can be used to make informed trading decisions.

💡Golden Ratio

The Golden Ratio, often denoted by the Greek letter PHI, is a mathematical concept approximately equal to 1.618, which is found in various aspects of art, architecture, and nature. In the context of the video, the Golden Ratio is integral to the Fibonacci sequence and is used to calculate retracement levels that may indicate potential reversal points in the stock market.

💡Fibonacci Numbers

Fibonacci Numbers are a sequence of numbers in which each number is the sum of the two preceding ones, usually starting with 0 and 1. These numbers frequently appear in nature and are the basis for the Fibonacci retracement tool. In the video, the speaker explains the sequence and its prevalence in natural phenomena, such as the arrangement of petals in flowers and the spiral pattern of a pineapple's cones.

💡Retracement

In financial markets, a retracement refers to a temporary price movement opposite to the prevailing trend. In the video, retracement is explained as a concept where the market reverses direction, and the speaker uses Fibonacci retracement levels to predict potential reversal points in the market trend.

💡Stock Market

The Stock Market is a platform where shares of publicly traded companies are bought and sold. In the video, the speaker discusses the application of Fibonacci retracement in the context of the stock market, using it as a tool to analyze and predict price movements.

💡INDOT Trading View

INDOT Trading View is mentioned in the video as a free website that the speaker uses for charting and analysis. It is an example of a platform where traders can visualize and apply technical analysis tools like Fibonacci retracement to make trading decisions.

💡Candlestick Chart

A Candlestick Chart is a style of financial chart used to represent the opening, closing, highest, and lowest prices of a security, typically over a specified time period. In the video, the speaker refers to a 'Morningstar' candlestick pattern, which is a specific type of pattern that can signal a potential reversal in the market trend.

💡Nifty 50

Nifty 50 is an index representing 50 of the 1600 companies listed on the National Stock Exchange of India. It is used as a benchmark by Indian investors and is mentioned in the video as the market index the speaker is analyzing using Fibonacci retracement.

💡Futures Contract

A Futures Contract is a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. In the video, the speaker mentions buying a Nifty April futures contract, demonstrating the practical application of Fibonacci retracement in taking and closing a trade for profit.

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