"How to Successfully Trade Commodities"
Commodity Trading using Fibonacci Numbers
is a good day to get on the long & winding road to trading commodity futures successfully ... Although the commodity markets actually comply to 'natural
law' or it is simply the result of many commodity trading
programs acting in unison, markets tend to react to
a certain set of ratios. Before we go into what these
ratios are, we'll first cover where they are derived.
Back in the late 12th century lived a man called Leonardo
Fibonacci de Pisa. It is said that he had returned from
a trip to Egypt where he came across a set of numbers
with many remarkable properties. Apparently, it was
his study of the Pyramid of Gizeh that he noticed the
"Golden Ratio" that the ancient Egyptians
had integrated into its dimensions. Today we refer to
this sequence of numbers as "Fibonacci Numbers."
The numbering sequence follows: 1, 1, 2, 3, 5, 8, 13,
21, 34, 55, 89, 144, 233, 377… As you can see,
each number is the result of adding together the previous
two numbers in the sequence. This can be done right
The interesting properties of these numbers, after
getting past the first 4, are as follows: Each number
in the sequence is approximately 1.618 the previous
number. The higher the number, the closer to this ratio
it will be. On the reverse, each number is approximately
.618 of the next higher number.
The higher the number, the closer to this ratio it
will be. Alternate numbers will be 2.618 of each other,
such as 377 to 144. The inverse is .382.
These ratios also interrelate to each other as follows:
- Square of .618 = .382.
- Square of 1.618 = 2.618
- 2.618 x .382 = 1
- 2.618 – 1.618 = 1
- 1.618 x .618 = 1
- 1.618 - .618 = 1
There are many other interesting facts that we can
bring up about the Fibonacci numbers and ratios, but
we'll dispense with it now and discuss the application
of Fibonacci to market analysis and trading.
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Fibonacci ratios more often than not manifest itself
in the patterns of market prices. By examining any price
chart, you should be able to note this for yourself.
The simple approach to using Fibonacci is in price support
- resistance discovery.
As found in many commodity trading programs today,
what is called 'Fibonacci Retracements' are derived
by taking a market range, such as a market bottom to
a top, and dividing that range by these Fibonacci ratios
of .382, .618. Click-now for Trading Tip of the Day.
There are also other Fibonacci ratios you can use,
such as .786 and .236. .786 is the square root of .618,
and .236 is from multiplying .382 with .618. Example:
Suppose we look on our daily price chart and see an
obvious market bottom at 150. Now suppose that price
moved up for some days and eventually made a top at
We know this to be a top because price has started
to move down from that top. All we would have to do
to get our Fibonacci static support/resistance prices
is to take the top price of 200 and subtract from that
the bottom price of 150. Our RANGE would then be 50
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Take the RANGE (50 Points) and multiply it by the Fibonacci
ratios of .236, .382, .618 and .786. We would end up
with the following results:
(50 x .236) = 11.8
(50 x .382) = 19.1
(50 x .618) = 30.9
(50 x .786) = 39.3
Since price is moving down from the top price of 200,
we would subtract the results of these ratios from 200
to get our SUPPORT prices.
(200 – 11.8) = 188.20
(200 – 19.1) = 180.90
(200 – 30.9) = 169.10
(200 – 39.3) = 160.70
The process is the same for price ranges that go from
top to bottom, where price is starting to move up again.
In those cases you would simply add the results of those
ratios to the bottom price to get your RESISTANCE prices.
Fibonacci ratios can also be useful at times for discovering
when a top or bottom may form in the commodity you are
trading. The process is to simply count the days between
two tops or bottoms (or whatever combination you care
for) and multiply by .618. Take the result and add to
the second top or bottom in your equation to forecast
out a possible turn.
Another time approach is to take any major top or bottom
and then count forward a Fibonacci number worth of days
into the future, such as 34, 55, 89 days and so-forth,
that will produce a future date in which to look for
a possible market top or bottom to occur.
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As with anything else in trading, price will not always
find Fibonacci support / resistance nor will it always
turn at your Fibonacci time day counts. Other methods
and indicators could and should be employed along with
Fibonacci ratio work in market analysis. However, due
to the frequency of ratios affecting market action,
it would be worth your time to further your study in
Fibonacci numbers/ratios. To
read more about successfully commodity trading click-here!
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