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A few weeks ago I published the first part of this section in my Blog called "The importance of Technical Analysis in Trading", in it I explained that it was the Technical Analysis, because this is important for the world of investments in financial assets and that it was the "Horizontal Support and Resistance". To see the introduction to this section click HERE
Now continuing with the financial education through my Blog, the time has come to continue this section; and in this opportunity I will explain what is "The Mathematical Supports and Resistances". Yes, there is more than one type of Mathematical Support and Resistance in the financial and technical analysis world, the mathematical support is one of the most important and used for years by all analysts and investors, which makes these studies that I will present, one of the most used globally.
Mathematical supports and resistances
In order to explain in detail what the mathematical supports and resistances are, we must first know the following:
What are Fibonacci numbers?
They have their origin under a man named Leonardo Pisano, who is also known as "Fibonacci". To get to the point at this point, in mathematics the succession of Fibonacci numbers is known, a series of natural numbers worth the redundancy, in which each term is the sum of the two previous ones, that is, it begins with 0, then 1, would follow with 1 (sum of 0 and 1) to continue with 3, 5, 8, 13, 21, 34, 55, 89, 144... and so on infinitely.
In this way, thanks to this succession of numbers, mathematical and statistical studies were established in trading that help the analyst to make the best investment decisions, in order to place the probabilities in his favor, either by buying or selling an asset and determining in which points mathematically speaking it is more likely that the price will stop and make a stock.
To begin, we will review the classified ratios of the Fibonacci Retracements and Fans, they are:
The most important ones:
To a lesser extent:
The last two are the possible reversals (profit taking) of a rally (development of the price curve in a rising or falling direction).
After a reversal pattern of any kind is detected, the "Fibonacci Studies" provide a solution to the decision making that can be made on the chart, in order to determine market entry or exit. These so-called ratios will form lines that delimit areas of probable technical rebound of the price and the most interesting and important thing about this, is that we have a support or resistance that comes not from the linear or horizontal study, but it is also a mathematical ratio that completes such analysis.
How do you draw Fibonacci Fans and Backs?
To plot these two studies in a graph is very simple and in this post I will show you how to do it, so you can see in detail how to use them correctly.
Before showing you how to plot these studies you should take into account the following:
In order to observe the supports and/or mathematical resistances with Fibonacci for an uptrend, you must plot from the "minimum" point of a trend to the "maximum" point of the same. If it is for a downtrend it is the complete opposite of this.
You should be very aware of the Fibonacci ratios that make up the major areas of these studies, which are 38.2%, 50% and 61.8%. Since most traders take these zones into account to make important investment decisions, so if most of them do, we should follow the trend of the big traders to follow winning trades.
Application in bullish trend:
Application in Down trend:
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