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Follow Fibonacci In Commodity Trading

The use of Fibonacci in commodity trading helps to show the trader when the market may find support and resistance levels.

Fibonacci or the FIB tool consists of horizontal reference lines spaced at intervals determined by a mathematical formula which act as a background to the ongoing price action of the commodity being traded.

When the commodity trader watches the price movement she looks for what is called Fibonacci retracement.

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Let’s say you are trading soybean futures and the price is moving higher.

You will be looking to see whether the price action retraces up to and through a resistance line or whether it bounces back off this Fibonacci reference line.

Using Fibonacci in commodity trading means these FIB levels provide commodity traders with a fixed reference point which can give strong indications as to future price movements in any particular commodity.

In most cases professional commodity traders expect the FIB levels to be hit and so it often becomes a self-fulfilling event.

What exactly are the Fibonacci numbers?

Firstly, a little background as to why they are so-called.

Leonardo Fibonacci (c1170-120) was an Italian mathematician, who in his childhood had developed a strong understanding of the Hindu-Arabic number system.

After extensive study he published a seminal work called Book of Calculation, the Liber Abacci, which introduced the concept of number sequence to the West.

Over time these number sequences came to be known as the Fibonacci numbers.

Just look at these numbers:

0 1 1 2 3 5 8 13 21 34 55 89 144 233 377 610 987 `1597

How do we get to this sequence?

Just take at the left and add the two numbers together, so we have: 0 +1 = 1

Then, add the previous number to the newly formed number in the calculation, so we have:

1+1 = 2, here 2 is the new number and we add the previous number, 1, to make 2. And 13+21=34.

Take for example, 377. 377 plus its previous number 233 equals 610.

Now if we take any number in the sequence and divide by the previous number and following number we will get the same results, 1.618 and 0.618 respectively.

For example, taking 55, we have 55/34 = 1.618 and 55/89 = 0.618.

This ratio is known as the Divine Proportion or the Golden Mean, and is important as it is a mathematical truth that holds throughout time and space.

Now instead of taking the number either side of the chosen numeral, for example, 34 and 89 being linked to 55, we take the next but one number.

So we take, say for 233, we take 89 and 610, and divide 89 by 233 gives 0.382, while dividing 233 by 610 gives again 0.382.

And now take these two numbers we calculated above: 0.618 + 0.382 = 1

If we repeat this process but this time we take the next but 2, for example, choosing 89 we select 21 and 377, then we get 89/377 = 0.236.

And if we take this number away from 1: 1-0.236 = 0.764

Can you see what we are building here?

It is a series of dividing lines from 0 to 1 derived from the Fibonacci sequence.

The fifth number is the half way point between 0 and 1, which is 0.5, and so we now have the whole set of Fibonacci numbers which you will see on most electronic trading software platforms, or which can at least be added by the commodity trader if they so wish from a menu.

The five numbers are: 0.236, 0.382, 0.5, 0.618, 0.764

So here we have the basis of the guiding lines that commodity traders watch closely, the lines that show were support or resistance is forming and that, for example, the commodity is trading in a narrow range between two of these FIB levels.

Among the other tools and techniques available to the commodity trader are indicators such as the moving average, Japanese candlesticks,support and resistance and relative strength index.

Using Fibonacci in commodity trading is only part of the answer to helping you make sense of the market movements and should be used as part of a comprehensive commodity trading system to make the right decisions.