Fibonacci Clusters to increase your Trading Odds
By Yuriy Bishko Updated November 21, 2021
Not everyone considers instruments based on Fibonacci sequences applicable to trading on financial markets. Perhaps, this extreme view is caused by traders from the opposite camp who fanatically use Fibonacci numbers and use them thoughtlessly in trading. As a result, two opinions are formed – either I do not recognize the Fibonacci sequence as a phenomenon completely, or I confine myself to Fibo Nets and nothing else.
Today we will consider a simple and effective way to apply Fibonacci levels without any ambiguous interpretations. Due to its simplicity, even a beginner will be able to fully master this method. We will talk about Fibonacci clusters , what they are and how to apply them in trading.
The Fibonacci method has proved itself a long time ago and is widely used by traders all over the world. It has gained the greatest popularity among wave traders for whom the Fibonacci lines (grid) are an instrument at hand for determination of various impulse and correction waves. However, the usefulness of these tools requires that all traders without exception know and use them, as it allows to understand everything that is happening in the market, soberly assessing the situation, and finding confirmation of certain figures of continuation and reversal, which helps to weed out some of the false signals, making the trade much more effective.
Fibonacci Ratio Basics
Fibonacci Ratio Basics is a numerical sequence with the same name. It is a fairly simple algorithm. The sequence is built on the following principle: each next member of the sequence is equal to the sum of the previous two. It starts with zero.
Since Fibonacci levels are used by many traders, some cases of support/resistance can turn out to be self-fulfilling predictions. Some traders use “fibs” as a reference point to determine stop order levels. For instance, they place their stops about a quarter point or so below the 61.8% Fibonacci retracement level of the previous high, depending on the stock’s volatility.
What Is Fibonacci Confluence?
A Fibonacci confluence, or cluster, is a group of Fibonacci lines that are relatively close to each other. By constructing Fibonacci lines relative to different market extremums, we summarize the evaluation of all traders. Thus, the accumulation of lines in one place will mean the most probable location of a key level or, better to say, a key zone.
You see Japanese candlesticks or bars, and cluster analysis shows you what’s going on inside the candlestick itself. Understanding cluster definition and analysis allows you to look at the candle from the inside. That is, you see a candle, and cluster analysis shows you exactly where the volume has passed. In each candle, you can see a large volume that has been bought. You can say that the lines are clustered definition and idea of which is the meaning of Fibonacci Confluence. Join our course to find out all the secrets and tricky points of this instrument to improve your trading strategy and get profit sooner.
Fibonacci Retracements Cluster
The Fibonacci cluster trading method is based on the market axiom – any trend sooner or later ends with a reversal or retracement. To make a profit, it is necessary to calculate (or guess) the moment when the trend reverses. Fibonacci clusters are believed to help find these points.
Fibonacci retracement is a well-known and popular technical instrument which indicates the support/resistance levels at which price will be able to stop or end its movement.
To draw Fibonacci points, the trend reversal point is used (depending on what kind of movement: short-term or long-term, the Fibonacci line scales are also obtained short-term or long-term). To get a cluster, it is necessary to draw several rows of Fibonacci levels (both long- and short-term) from one common point. The places where these levels will overlap each other will be called Fibonacci clusters.
- - The level of 23.6% is not used to enter the market, because the probability of reversal at this point is too low.
- - The level of 38.2% is used for the long-term trend. In the places where this mark forms an alliance with the 50% and 61.8% lines of the short-term chart, there is a considerable chance of a short-term pullback.
- - 50% on the short-term chart is an important entry point. It often coincides with the reversal lines of the long-term trend.
- - 61.8% level – this number correlates with the golden section. At this point, long- and short-term Fibonacci levels often combine into a cluster. The cluster formed in this zone is considered to be the strongest place for pulling back and is often used by traders to enter the market.
- - The 78.6% level is used to set stop losses. It is assumed that the further the price has gone in its pullback from the previous high or low, the more likely it is not just a pullback, but the beginning of a new trend. In this case a stop loss placed in the Fibonacci cluster at 78.6% will allow the trader to minimize his losses.
The property of ending of retracement at key retracement levels can indeed be found on modern currency market, however when using Fibonacci retracement it is much more important to understand which level exactly the retracement will reach, that is which of the key retracement levels the price will eventually reach. Using Fibonacci cluster indicator in analysis allows to answer this question at the very beginning of the retracement movement, which is a brilliant opportunity to open a deal precisely, targeting it.
Fibonacci Retracement And Projection Cluster
It’s not forbidden to set levels greater than 100 (or less than 0 if you like, which is the same thing). You will get Fibo levels called projection. With the help of projection we can find the end of the trend itself, not the correction. The older the timeframe, the more reliable the Fibo level. It is possible to supplement the Fibo tools with usual means of technical analysis: trend lines, channels, indicators (moving averages, Bollinger Bands, etc.), to combine the projection and the divergence in order to find the end of a trend.
The Fibonacci projection is not a separate TA tool, and most trading software packages do not add it as an independent tool. It is necessary to add two levels P 127.2% and P 161.8% to the general list of retracement levels from 0 to 100% to work with the projection. These levels will expand the general list and will be used as “projection levels” in the analysis and trading.
By using these levels, if there is a group of support/resistance clusters, you can determine which of the many clusters (usually 3 to 5) will be key for price and from which price can bounce the most. Both of these analysis procedures can be performed with the projection either together, if there are enough conditions for the construction of the instrument, or separately, depending on the current market situation.
Fibonacci Projection And Extension Cluster
Many traders have problems with Take Profit, some make them very small, while others – wait too long expecting big profit, which often leads to disappointing results. When trading cluster methods like Fibonacci Extension can become a useful tool to help you know exactly where to set your take profit goals.
To build a Fibonacci Extension, let’s imagine there is an uptrend on the chart. On the next pullback you entered buying. In order to determine the Take Profit levels, we need to set the “Fibonacci Extension”. To do this, go to the menu “Insert” – “Fibonacci” and select “Extension”. Now it is necessary, without releasing the left mouse button, to connect the minimum point on the chart and the correction start point. Then double-click on the dotted line and move the 3rd point to the end of correction. As a result, you will see the levels on the chart, where Take Profit values should be placed.
Keep in mind that the price does not always reach the levels with one-point accuracy. The Fibonacci levels, like trend lines and horizontal levels, are not exact tools for the price to reach point by point. They are just a supply and demand zone, and price may either miss them by a few pips or test them by creating a long tail candlestick.
Thus, Fibonacci levels in combination with other tools of technical analysis show excellent results, and Fibonacci expansions can be applied to determine profit taking targets. However Fibonacci lines are subjective because every trader has a different idea of how to draw Fibonacci levels.
Fibonacci Time Clusters
In addition, trading terminals (for example, cluster algorithm MT4 ) contain Fibonacci Time Clusters. This tool represents the vertical lines superimposed on the price chart in order to show the time intervals, where the change of trends is most probable. Two extrema are used for constructing such areas, the first of which must necessarily be a reversal. By connecting them to each other using the “Fibonacci Time Zones” tool, the trader will receive a series of vertical lines shifted to the future, where some peak price values are most likely to be observed. The Fibonacci numbers, or to be more precise, their ratio of 1.618, is used for calculating the duration of these time zones.
What is the Fibonacci cluster?
Clusters are a simple and effective way to apply Fibonacci extensions in trading. The main advantage of this method is that you don’t need to know which of the Fibonacci levels the price should bounce from – clusters speak for themselves. The clusters can show the whole zones of resistance and support, the uncertainty zones, within which it is better to refrain from trading. When you understand the meaning and all the advantages of the cluster forex or crypto trading become an easy thing for you. We can help you deepen into this topic at our course .
How do you trade Fibonacci clusters?
Cluster analysis allows to aggregate such data as delta for buying and selling, comparing the amount of executed buy and sell orders. Gathering such information will help a trader to evaluate why a certain situation occurred on the market, as well as to understand the market situation in more detail. It is important to learn how to read the provided data correctly and translate it to your strategy.
How do you use Fibonacci to forecast?
Cluster analysis allows to determine the zone of increased interest of market participants. In order to watch the increased volume cluster trading strategy will help you calculate the recommended buy level. Clusters differ in the degree of strength. The greater the accumulation of nearby levels, the stronger the resistance or support zone. It’s easiest to trade levels when there is a clear unidirectional movement. That way we’ll know where price is likely to go and we can enter the “flow” at the best possible offer.
There is a pushing cluster. It stands out significantly on the chart, because among a large cluster of similar clusters, you can see one that differs in growth rate. But it should be noted that if there are pushing clusters, then there are stopping clusters accordingly. When you see a cluster filled in one range, that’s a great indicator, signaling a pushing cluster and an upward move. A stopping cluster is characterized by an imbalance of supply and demand, which encourages it to move downward.