Fibonacci Retracement

Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11 AM ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX, there are few better to talk on the subject of risk management. Bob has developed a method for breaking down his key fundamentals of risk management in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session.

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Who was Fibonacci?

Fibonacci was an Italian mathematician born in the 13th century, known by the name Leonardo Fibonacci, though he's also referred to as Leonardo of Pisa. He introduced a sequence to Western mathematics that has become integral to various fields, including trading. This sequence starts at 0 and progresses by adding the sum of the two preceding numbers—0 + 1 gives 1, then 1 + 1 gives 2, then 1 + 2 gives 3, and so on. This simple, yet profound pattern can be seen in many natural phenomena, from the arrangement of leaves on a stem to the spirals in seashells.

In financial markets, traders have taken this naturally occurring sequence and applied it to price movements. The mathematical relationships derived from this sequence, such as 23.6%, 38.2%, and 61.8%, are used to predict key price levels where reversals might occur. It’s fascinating how something developed in the 13th century still finds relevance in today’s fast-paced financial markets.

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How does the Fibonacci sequence apply to trading?

The Fibonacci sequence might seem like just a set of numbers at first, but its importance in trading lies in its ability to help identify potential levels of support and resistance. These are key levels where a stock or asset might pause or reverse during its price movement. Traders use Fibonacci retracement levels to gauge how much a price has pulled back from a previous trend, and they look for price action to either bounce or continue at these levels.

Let’s break it down: after a price makes a strong upward or downward move, it rarely moves in a straight line. It usually retraces a portion of that move before continuing in its original direction, or reversing. Traders use Fibonacci retracement levels, such as 23.6%, 38.2%, 50%, and 61.8%, to estimate how far that retracement will go. For example, if a stock moves up $100 and then retraces to $61.80, that 61.8% level would be a significant area where many traders would look for either a continuation of the upward trend, or a deeper reversal.

This tool becomes incredibly useful in highly volatile markets, where sharp price movements can be followed by quick pullbacks. The key is using these levels to make educated decisions about where prices might head next, giving traders an edge when managing entries and exits.

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Why is Fibonacci retracement considered a powerful tool?

Fibonacci retracement is powerful for several reasons, but its most important feature is its ability to provide traders with a structured way of analyzing price movement. Markets often move in waves—what traders refer to as impulsive moves followed by corrective moves. The Fibonacci retracement tool provides an indication of how deep a correction might be before a new trend resumes.

The tool’s power comes from its widespread use. Many traders and investors look at these key Fibonacci levels, which creates a kind of self-fulfilling prophecy. When enough market participants anticipate support or resistance at these levels, it often results in a market reaction around those prices. That’s why you’ll often see sharp reversals or consolidations at or near these Fibonacci levels.

Another reason Fibonacci retracement is so valuable is its simplicity. The calculations are built-in on most trading platforms, making it accessible even to newer traders. Despite its simplicity, it holds a great deal of predictive power. You don’t have to subscribe to a fancy service or buy a proprietary indicator—this is just math, freely available to all.

However, it’s important to keep in mind that Fibonacci levels are not foolproof. They provide potential price zones but should always be used in conjunction with other forms of analysis. Successful trading is about combining various tools and strategies to increase your probability of success. Fibonacci is just one part of the toolkit.

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Any advice for traders using Fibonacci retracement?

Fibonacci retracement is a great tool, but like any tool, it’s important to use it wisely. It’s not a crystal ball, and it doesn’t guarantee success. What it does offer is a structured approach to analyzing price movements and identifying potential areas of interest. My advice to traders is to always use Fibonacci retracement in conjunction with other technical and fundamental analysis tools.

For example, if you see a Fibonacci retracement level aligning with a previous support or resistance zone, that could strengthen the case for a potential reversal at that point. Similarly, combining Fibonacci retracement with volume analysis can help you determine whether a move is backed by strong market sentiment.

Lastly, always remember to manage your risk. Even if you’re confident that a price will react at a Fibonacci level, the market can still surprise you. Setting proper stop-loss orders and using position sizing strategies are crucial for long-term success. It’s all about stacking the odds in your favor while protecting your downside.

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Disclaimer: Live Sessions (hereafter referred to as the “Content”) are produced by TradeZero. The Content may include the views and opinions of TradeZero and a third-party participant, Bob Iaccino. Bob Iaccino is compensated by TradeZero for participating in the Content. Mr. Iaccino’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero is not responsible for and neither affirms nor endorses any of Mr. Iaccino’s views or opinions expressed in the Content. TradeZero makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.

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