If you are like most people who day trade, you are always looking for an edge. That one particular strategy that can help you increase your profits and lower your losses. Well, what if there was an indicator based upon mathematical statistics that could do just that? Fibonacci day trading is a strategy that uses the Fibonacci number sequence to predict future price movements. This article will discuss day trading using Fibonacci and how it can help you become a more successful trader.

## Fibonacci Numbers and Ratios

Fibonacci was an Italian mathematician who initially developed the sequence. The Fibonacci sequence is a series of numbers, where each number is the sum of the previous two. The sequence starts off like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89… and so on. It is easy to see that each number in the sequence is simply the sum of the two previous numbers.

The numbers in the sequence can be used to calculate various ratios by dividing 2 of the numbers. The most important Fibonacci ratio, for our purposes, is 61.80%. This is derived by taking any number in the sequence and dividing it by the number that precedes it. For example:

21/34 = 0.617

55/89 = 0.618

233/377 = 0.618 etc…

This number, 61.80%, or its inverse, 38.20%, is found throughout nature and is referred to as the “Golden Ratio”. Humans are naturally attracted to things in proportion with the Golden Ratio because it is considered visually appealing.

Now that we have an idea on what is a Fibonacci sequence, let’s see how we can use it to our advantage.

Fibonacci day trading uses the Fibonacci sequence to predict future price movements. The idea is that prices will tend to move in cycles, and that these cycles can be predicted using the Fibonacci sequence. By identifying these cycles, Fibonacci day traders can enter and exit trades at the most advantageous times!

So, how does one go about Fibonacci day trading and using it to determine our rules? There are a few different ways, but the most popular methods are to use Fibonacci retracement levels or Fibonacci extensions.

## Fibonacci Retracement

Fibonacci retracement levels are horizontal lines that are placed at certain Fibonacci levels. They are a popular tool that technical traders use to identify potential support and resistance levels. Support and resistance are essential concepts for day traders because they help us determine where to enter and exit our trades.

The theory behind the retracement levels is that after a price moves in a particular direction, it will retrace or pull back by a certain percentage before continuing in the original direction. These percentages are based on Fibonacci ratios, and they include 23.60%, 38.20%, 50.00%, 61.80% and 100.00%.

Using Fibonacci retracement levels, Fibonacci day traders can enter trades at these critical levels and ride the price movements up or down. This potent tool can be used to increase profits and lower losses.

Technical traders will often look for Fibonacci levels where the price has retraced after a move higher or lower to enter a trade in the direction of the original movie. For example, if the price of a stock moves higher and then retraces to the 38.20% or 50% Fibonacci level, this might be seen as a potential buying opportunity by some traders.

Regarding day trading, Fibonacci retracements can also be used on intraday charts to identify potential support and resistance levels for the day. This can be especially useful for day traders looking to enter and exit trades quickly.

While Fibonacci retracements can be a helpful tool, it’s important to remember that they are just one of many possible technical indicators that traders can use. It’s also worth noting that fib levels are not always exact, and prices can sometimes move beyond them. As with any trading strategy, it’s essential to test it out with paper trading before trading with real money.

## Fibonacci Extensions

Fibonacci Extensions are another tool that can be used to identify potential areas of support and resistance.

Extensions are found by applying the Fibonacci ratios to the swing high and swing low of a stock price. A swing high is the highest point reached in an upward move, while a swing low is the lowest point reached in a downward move. By applying the Fibonacci ratios to these points, we can derive possible areas where the stock price may find support or resistance.

The most important Fibonacci Extension levels are 161.80%, 261.80%, and 423.60%. These numbers are derived by taking the Fibonacci ratios and multiplying them by the distance between the swing high and swing low. For example, if the distance between the swing high and swing low is 100 points, then the 161.80% Fibonacci Extension level would be 161.80 points higher than the swing low.

Now that we know how to find Fibonacci Extensions, let’s look at an example of how we can use them to day trade.

Say you are watching stock XYZ, and you see it start moving up off a swing low. As it starts to move up, it begins to stall at a certain price level. You could enter a long trade at this point with a stop loss below the swing low and put in a target at the 161.80% Fibonacci level.

This is just one example of using Fibonacci Extensions to day trade. There are many ways that you can use them, so make sure to do your research so that you can find the method that works best for you.

## thinkorswim Fibonacci Tools

Here are instructions for adding the Fibonacci tools to thinkorswim charts.

1. Open trading platform. Select Charts.

2. Select Drawings. Select Drawing Tools.

3. To select Fibonacci Retracement, select the tool that looks like a percent sign (%).

4. To select Fibonacci Extension, select the tool right next to the retracement.

## Summary: Fibonacci Day Trading

Most day traders are always looking for that one thing that can help them increase their profits. And while there are many techniques and indicators, Fibonacci day trading may be among the most powerful. This method is based upon mathematical statistics and can help you predict future price movements using either the retracement or the extension tools.

**Learn More**

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Feel free to check out other **FREE** educational resources to help guide you as you begin your new journey to financial freedom.

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