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Using Automated Fibonacci Trading to Profit From Trends

October 5, 2021 by Daniels Trading| Tips & Strategies

Perhaps the best thing about trading the futures markets is the ability for participants to profit from trends. Strong moves in price offer beneficial risk versus reward ratios and provide an opportunity to realize extraordinary profits. One way in which active traders pursue profits via trend trading strategies is through automated Fibonacci trading.

In this article, we’ll take a closer look at Fibonacci technical analysis and how to use Fibonacci retracement to enter a trade.

Viewing the Fibonacci Retracement from a Market Perspective

Credited to Leonardo of Pisa in the late-12th century, the Fibonacci sequence is a mathematical formula with boundless applications. It is comprised of the following progression of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, on to infinity. The pattern is simple, as each number in the sequence is the sum of the previous two integers.

More involved is the golden ratio (1.618033), which represents the proportionality of one Fibonacci number to another. Accordingly, Fibonacci sequence trading involves various technical tools, including Fibonacci retracements, extensions, and expansions.

So what are Fibonacci retracements? Simply put, they are a set of measurements derived from the golden ratio that may be used to place price action into a manageable context. This is accomplished by measuring the distance from a periodic high to a low and then applying the specific retracement ratios to the aggregate value. Typically, calculations are done automatically via a simple retracement calculator.

Here are the ratios included in a standard set of automated Fibonacci trading retracements:

  • 23.6%
  • 38.2%
  • 61.8%

In addition to these values, traders often add the 50 percent and 78.6 percent retracements to their calculations. Though not technically a part of the golden ratio, the Fib levels 78.6 percent and 50 percent come standard within the functionality of the best Fibonacci trading software suites.

Fibonacci Live Trading: Understanding How to Apply Retracements to Trending Markets

Trend trading is a strategy that aims to secure profit from the momentum driving a directional move in price. To be a successful trend trader, you must be able to do two things:

  1. Identify trends in a timely fashion.
  2. Select ideal market entry and exit points.

Of course, these two tasks are much easier said than done. However, there’s good news: Using Fibonacci in trading and applying automated Fibonacci trading tools can make each function vastly easier.

For instance, a trend may be deemed active or concluded when the following characteristics are exhibited in conjunction with retracement levels:

  • Active: A market is considered to be trending when a pullback from a directional move in price (from peak to trough or vice versa) fails to extend above or below the Fibonacci 38.2 percent retracement or 61.8 percent retracement levels. In a similar vein, the Fibonacci retracement 50 rule states that a security’s price gives back between 50 percent and 67 percent before resuming the broader uptrend.
  • Concluded: In the event that price penetrates the 61.8 percent retracement level, the prevailing trend is deemed over. The market is then primed to enter either a rotational phase or an outright reversal. Once again, correctly evaluating price action with regard to each retracement level is the key to successful Fibonacci financial analysis.

Here are a few ways that Fibonacci price action is commonly viewed when trading golden ratio levels on trending markets:

  • Market entry: Getting in on a trend can be a challenge. In many cases, traders arrive too late and end up buying the market’s periodic top or selling an intermediate-term bottom. However, by entering a trend after a pullback has occurred, you can improve your trade’s location. Common values that traders use for this market entry technique are the 38.2 percent and 61.8 percent retracements.
  • Risk management: Because retracements are viewed as potential areas of support and resistance, they are useful in the placement of stop-loss orders. Closing an open position once a trend proves exhausted is a good way to avoid losses due to market reversal.
  • Counter-trend strategies: In the event that a trend is deemed finished, an opposing position may be taken. This type of approach is especially valuable in reversal and rotational strategies.

The beauty of Fibonacci tools is that they may be easily applied in live market conditions. Most software trading platforms offer automated Fibonacci trading indicators that feature drag-and-drop functionality.

However, a word of warning: Capitalizing on the power of free Fibonacci trading software involves judgment. Accurate calculations rely on the proper time frame, wave count, and ideal peak-trough values being chosen. Ultimately, learning how to apply Fibonacci technical analysis properly requires time, experience, and additional education.

Getting Started with Automated Fibonacci Trading

Although Fibonacci retracements are powerful analytical devices, they are not the only technical tool out there. Like most other indicators or studies, retracements are best used within the framework of a comprehensive trading plan.

For information on Fibonacci tools and more, download our free e-book Basic Training for Futures Traders. You’ll find tips on futures trading essentials from industry professionals and active traders and learn techniques to become a disciplined trader.

Download Basic Training For Futures Traders Ebook

This blog was originally published March 18th, 2019 and has been updated for accuracy and comprehensiveness.

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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