Learn How to Use the Fibonacci Tool
- The Fibonacci tool helps measure retracement
- It also focuses on measuring the expansion
- The 3 most important parts of the Fibonacci tool are Arcs, Fans, and Time Zones
Fibonacci Tools Explained – What Are They?
The Fibonacci charting tools are based on the Fibonacci sequence levels and Fibonacci ratios. The most known one is the Fibonacci retracement tool.
There are many types of Fibonacci tools trading. They include the Fibonacci retracement tool, the Fibonacci expansion tool, the Fibonacci Arcs, the Fibonacci fan, and the Fibonacci time zones.
The Fibonacci tool’s meaning varies from tool to tool. Each tool is used for different purposes, but generally speaking, the Fibonacci tools are used as a support and resistance. The levels can be used for breakouts, bounces, entries, stop losses, and targets.
The trading community highly appreciates these Fibonacci trading tools. The Fibonacci tools Forex has always been popular.
But the Fibonacci tool cryptos and Fibonacci tool Bitcoins are also gaining momentum. Especially the Fibonacci retracement tool cryptos is receiving attention because cryptos typically see deep pullbacks within their trends.
Fibonacci Retracement Tool
The Fibonacci ratios are used for the Fibonacci retracement levels. The levels represent support or resistance levels.
- The Fibonacci tool shows the Fibonacci retracement support levels when an uptrend is taking place.
- The Fibonacci tool shows the Fibonacci retracement resistance levels when a downtrend is taking place.
- Fibonacci levels are not useful if price action is in a range.
Traders can find the levels by placing the Fibonacci tool on a start and endpoint. Usually, traders place the Fibonacci tool on a price swing or candlestick. The Fibonacci tool trading in Forex is the same as the Fibonacci tools crypto and the Fibonacci tools Bitcoin.
Traders use the retracement levels for entries. They can also wait for candlestick patterns to emerge at the Fibonacci levels before entering setups.
Here is an overview of the basic key levels:
- 23.6% = retracement level
- 38.2% = retracement level
- 50% = retracement level
- 61.8% = retracement level
Here are other levels that some traders use:
- 0% = start or end
- 76.4% = retracement level
- 78.6% = retracement level
- 88.6% = retracement level
- 100% = start or end
- 138.2% = key corrective level
Plus the Fibonacci retracement tools can also be used for adding targets. In that case, traders need to add minus values to their Fibonacci tool (see the FAQ at the bottom of this article how to add levels):
- -27.2% = first target
- -61.8% = main key target
- -100% = target
- -161.8% = target
- -200 = target
- -261.8% = target
- -423.6% = target
Fibonacci retracement tool crypto is the same one as all other Fibonacci retracement tools. There is no difference whether traders analyze Forex, cryptos, Bitcoin, commodities, CFDs, or stocks.
Fibonacci Expansion Tool
The Fibonacci expansion tool is used for determining targets. Traders can find the levels by placing the Fibonacci tool on a start and endpoint. But they add a third point, which is the place where price action bounced.
Once a trader has these 3 points, the Fibonacci expansion tool plots the targets on the charts. The main target levels are these:
- 61.8% level
- 100% level
- 161.8% level
The Fibonacci retracement tool and the Fibonacci expansion tool are the most used ones in the world of trading. These are the real Fibonacci trader tools. That said, let’s review the other three Fibonacci tools that every MT4 platform offers.
Fibonacci Fan, Arcs And Time Zones
These three Fibonacci tools trading all have different purposes. Let’s review all of them one by one.
The Fibonacci uses two points just like the Fibonacci retracement tool. Traders choose a start and endpoint. Usually, traders use a price swing or candlestick for the start and end.
The Fibonacci fan lines appear on the chart after the Fibonacci fan is placed on the chart. These lines are similar to trend lines. There are three standard levels:
- 38.2%: steepest trend line
- 50%: in between steep and shallow trend line
- 61.8% shallowest trend line
These trend lines offer support and resistance zones, just like the Fibonacci retracement levels. The main difference is that the Fibonacci fans have levels with a fixed angle rather than horizontal levels.
Fibonacci arcs are even more dynamic than Fibonacci fan levels. Fan levels are semi-dynamic because the trend lines do have an angle. But the angle is fixed and will increase or decrease at the same rate for each candlestick or bar.
The Fibonacci arcs, however, are even more dynamic because the lines are moving at a curve. This means that the rate of change is not equal, like with the Fibonacci fan. Rather the angle of the trend lines changes over time. The angle becomes steeper over time.
Fibonacci Time Zones
The Fibonacci time zones are an indication of timing and not a support or resistance level. The Fibonacci retracement tool, Fibonacci expansion tool, Fibonacci fan, and Fibonacci arcs are all tools that provide support and resistance level.
The Fibonacci time zone is the only one that is different: it indicates timing via vertical lines.
Traders also use two price points: a start and endpoint. A price swing is often the most logical way for placing the Fibonacci time zones.
Vertical lines will be added to the chart once the Fibonacci time zone is placed on a start and endpoint. The difference between the start and end is considered one unit. Then the Fibonacci time zones use Fibonacci sequence levels to calculate the rest of the vertical lines:
- The difference between the start and end is used as the base.
- Numbers 2 and 3 indicate that the same time difference is between 0 and 1 as between 1 and 2 and 2 and 3.
- Then the Fibonacci sequence levels start to increase. The difference between the vertical lines starts to expand.
- The difference between 5 and 3 is 2. This means that the gap between lines 3 and 5 is twice as large as before line 3.
- The difference between 8 and 5 is 3. This means that the gap between lines 5 and 8 is three times as large as before line 3.
The Fibonacci time zones are moments when price action might end a cycle or price swing. It indicates a potential timing of a change. Of course, these levels are just rough indications and confirmation of your analysis is always needed.
What Did We Learn From This Fibonacci Tool Article?
This article explained that there are 5 types of Fibonacci tools. The two main ones are the Fibonacci retracement tool and the Fibonacci expansion tool. The MT4 platform also offers the Fibonacci arcs, the Fibonacci fan, and the Fibonacci time zones.
The Fibonacci retracement tool offers static support and resistance levels when a trend is available on a price chart. The levels are based on Fibonacci ratios. The retracement levels indicate where the retracement might end and the trend could continue.
The Fibonacci extension tools also offer static support and resistance levels. But the tools do not show retracements but rather targets.
The Fibonacci arcs and fans offer dynamic support and resistance levels. The lines change their levels as time progresses. Last but not last, Fibonacci time zones indicate key timing moments rather than horizontal levels.
Detailed Info On Fibonacci Tool
How Is Fibonacci Used In Trading?
The most common way of using Fibonacci in trading is via the Fibonacci retracement tool. This tool plots the Fibonacci ratios on any price chart, time frame, and instrument. The levels represent support or resistance levels. In case of an uptrend, the Fibonacci tool shows the Fibonacci retracement support levels. In case of a downtrend, the Fibonacci tool shows the Fibonacci retracement resistance levels. Traders can use the retracement levels for entries or wait for candlestick reactions to the support and resistance levels before entering setups. The retracement tool can also show the Fibonacci targets as well. The Fibonacci expansion tools also plot Fibonacci targets.
How Do You Use Fibonacci Tools?
The Fibonacci retracement tool is used in MT4 by clicking on insert at the top of the platform. Then click on Fibonacci and retracement. Then traders need to click on the start point on their chart, keep holding the left mouse button, and only release the mouse button when they have reached the endpoint. Many traders start left and draw to the right. They start low and end high for bullish price swings and start high and end low for bearish price swings. But there are also traders that use the opposite logic. You can always edit the location of the Fibonacci tool by double-clicking on the left mouse button and then moving the start or endpoint. You can also delete the Fibonacci tool or edit its properties by right-clicking on the start or endpoint.
What Are Fibonacci Tools?
The Fibonacci tools include the Fibonacci retracement tool, the Fibonacci expansion tool, the Fibonacci Arcs, the Fibonacci fan, and the Fibonacci time zones. The Fibonacci retracement tool shows the Fibonacci ratios as a retracement based on a start and endpoint. The Fibonacci expansion tool shows the Fibonacci targets based on the start, end, and bounce points. The remaining Fibonacci tools are used less frequently by traders. They represent timing aspects based on the Fibonacci concept. A Fibonacci fan shows trend lines with Fibonacci ratios. Fibonacci arcs are support and resistance levels that arc with time. And Fibonacci time zones show at what point larger price movements are likely to take place.