You do not need to be around the stock market and traders very long before you hear about Fibonacci Retracements. Fibonacci was a 13th century mathematician. He discovered that a unique way he developed for a sequence of numbers had applications in the natural world. The Fibonacci sequence of numbers starts with one and progresses by creating the sum of the two previous numbers. (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.) It turns out that flowers, constellations, and seashells follow these sequences. The theory goes that Fibonacci numbers also predict human behavior and, specifically, stock market pricing. So, do Fibonacci numbers help in options trading?
Where Do Fibonacci Numbers Fit in Predicting Stock Prices?
Traders who use Fibonacci numbers in trading stocks use them to confirm what their technical indicators are telling them. Because they are “highly subjective” they should never be used solo in predicting how trends will progress up and down. Those who use Fibonacci numbers advise against applying them to time frames that are too short and price swings that are too small. Rather they may be useful in assessing larger adjustments in the market. Those who firmly believe in this approach say that it works about seven times out of ten. Those who disbelieve in Fibonacci retracements say traders use this approach for psychological comfort and not to predict hard and fast resistance levels.
Never Rely on Just One Indicator When Trading
We have made this point before. No matter what technical indicators you are comfortable using, do not rely on just one. Likewise, no matter how well technical indicators tend to work for you, keep an eye on fundamentals. That is why we at Top Gun Options so often talk about our DRINC acronym for Democrats, Russia, Iran, North Korea, and China. Understanding what drives someone like Vladimir Putin, Xi Jinping, or the nut with the nukes and missiles in North Korea helps us understand how their actions affect markets. Understanding how population demographics in China affect markets over the long term, appreciating that Covid was not “the flu” but rather biological weapon that escaped from a level 4 facility in Wuhan, China help us virtually print money as markets fall even as the “smart money” takes a bath over and over again.
Where an Approach Like Fibonacci Numbers Fits in Options Trading
The rationale for those who use this approach is that when prices rise or fall a given percent and then reverse it has to do with something basic to human nature. If you are having trouble deciding when a trend is likely to reverse, your other technical indicators are not helping, and fundamentals are making no sense a price difference that fits two Fibonacci numbers may be telling. That having been said, always remember that you never have to trade a market that you do not understand and you should always, always hedge your trades so that you know going into a trade your worst and best case scenarios.
There are times like during most of 2020, 2021, and 2922 that it is not a good idea to trade options alone. 2023 is shaping up to be a similar year with war still raging in Ukraine, inflation still not tamed, and the very strong potential for a much worse recession that most expect. Working with our trading squadrons at Top Gun Options you will be able to potentially print money in both up and down markets and succeed when smart money everywhere is licking their wounds and crying foul.