Fibonacci Retracement Trading Strategy Python Code

[Patrizia Leones]

Bycombining technical analysis with programming capabilities, traders gain a deeper understanding of market dynamics and enhance their ability to execute trades with maximum returns. So let us dive in and unlock the potential of the Fibonacci Retracement Trading Strategy in Python for navigating volatile financial markets.

1.618 is known as the golden ratio. I suggest searching for the golden ratio examples on the Google images and you will be pleasantly astonished by the relevance of the ratio in nature.

The Fibonacci retracement strategy is a popular technical analysis tool to identify potential reversal levels in financial markets and is used by traders. Based on the Fibonacci sequence, this strategy involves plotting key retracement levels. The typical or default levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%, against a price movement.

Fibonacci retracement levels help traders to identify the entry and exit points for trades. Hence, the determination of the stop-loss and take-profit levels is done. When the price of an asset retraces to one of these Fibonacci levels, it may indicate a potential reversal in the prevailing trend.

The Fibonacci ratios, 23.6%, 38.2%, and 61.8%, can be applied for time series analysis to find support levels. Whenever the price moves substantially upwards or downwards, it tends to retrace back before it continues moving in the original direction.

The Fibonacci retracement strategy is commonly applied alongside other technical indicators and analysis techniques to confirm signals and enhance trading decisions. Additionally, it can be used across various financial instruments and timeframes, making it a versatile tool for traders across different markets.

This Fibonacci retracement trading strategy is more effective over a longer time interval and like any indicator, using the strategy with other technical indicators such as RSI, MACD, and candlestick patterns can improve the probability of success.

As we now know, retracements are the price movements that go against the original trend. To forecast the Fibonacci retracement level we should first identify the total up move or total down move. To mark the move, we need to pick the most recent high and low on the chart.

Use Objective Criteria: Define clear criteria for identifying swing highs and lows, such as significant price peaks and troughs, or use automated tools to detect these points. Additionally, consider using multiple timeframes to confirm key levels.

Validate with Backtesting: Test the Fibonacci strategy on historical data across different market conditions to ensure robustness. Avoid over-optimising the strategy based on specific past events. Incorporate risk management rules to limit potential losses.

Combine with Other Indicators: Use Fibonacci levels in conjunction with other technical indicators, such as moving averages, trendlines, or candlestick patterns, to confirm trade setups. This can help filter out false signals and improve the reliability of the strategy.

Stay Disciplined: Stick to predefined trading rules and objectives, regardless of emotional impulses or attachment to Fibonacci levels. Regularly review and adjust the strategy based on objective performance metrics and market feedback.

Adjust Parameters: Consider adjusting the sensitivity of Fibonacci levels by modifying the anchor points or using alternative Fibonacci tools, such as Fibonacci extensions or clusters, to better align with prevailing market dynamics. Additionally, apply filters to smooth out noise and focus on high-probability trade setups.

Mastering the Fibonacci retracement trading strategy in Python equips traders with a powerful tool for identifying potential price reversal levels and making informed trading decisions. By leveraging the Fibonacci sequence and ratios, traders can pinpoint key support and resistance levels, allowing for precise entry and exit points in the market. Through the implementation of Python programming, traders gain the ability to calculate and visualise Fibonacci retracement levels accurately, enhancing their technical analysis capabilities.

If you wish to learn more about the Fibonacci retracement strategy, check out the course on price action trading strategies. This course will help you learn the strategies and codes that help you to tweak, fine-tune and implement this strategy in the live markets. Learn how to spot and trade the most important trading patterns: double tops/double bottoms, triple tops/triple bottoms, head and shoulders. Get acquainted with several trading strategies, and price action tools such as pivot points and the Fibonacci Retracement levels via a practical approach. Enroll now!

Disclaimer: All investments and trading in the stock market involve risk. Any decision to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

The other condition is to identify the trend; we want to be sure that the stock price is in an upward trend because the idea with this strategy is to place a trade when the price retraces in an upward trend.

Therefore, we need to make a workaround to validate the direction of our trend. Our rule is simple, we compare ; if the previous inequality is True, we will say there is an upward trend. You can use any other method to estimate the direction of the trend.

Although our strategy has positive returns, it underperforms its benchmark (SPY). The main reason is the scarce number of buy signals; the blue line has too many horizontal intervals and indicates periods with no trades.

One recommendation is to reduce the size of trend_size and roc to generate more signals. The variable roc is the number of days to calculate the maximum and minimum value; therefore, a lower value implies fewer days to calculate the minimum and maximum value. Meanwhile, trend_size is the number of days to estimate the trend; it is more likely to have an upward trend with fewer days.

This section intends to put into practice the previous trading strategy to see the performance with more financial instruments. The following chart shows the performance of the strategy against an equal-weighted strategy in six ETFs:

The strategy is implemented using Python functions. It involves downloading financial data, calculating Fibonacci bands, and creating trading rules. The Python code utilizes libraries like pandas and implements functions to handle data, calculate ratios, and generate buy and sell signals.

Hakan Samuelsson and Oddmund Groette are independent full-time traders and investors who together with their team manage this website. They have 20+ years of trading experience and share their insights here.

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C# is a popular programming language for developing trading applications and algorithmic trading strategies. This code is a simplified demonstration. In a real trading application, you would likely have more comprehensive input data, error handling, and integration into a larger trading strategy or platform.

In the ever-evolving world of trading, embracing tools like Fibonacci retracement and algorithmic trading can give you a competitive edge. It's a fusion of technical analysis and cutting-edge technology, opening up new possibilities for traders.

Relying solely on Fibonacci retracement without considering other technical indicators or fundamental analysis can be risky. It's usually best used as part of a comprehensive trading strategy. While Fibonacci retracement is a valuable tool for many traders, it's essential to recognize its limitations and not base all trading decisions solely on it. It should be used in conjunction with other technical and fundamental analysis, risk management strategies, and a good understanding of market conditions.

At times it feels like traders give the Fibonacci trading sequence an almost mystical power. Yet, despite its mysterious accuracy in trading and in nature, Fibonacci is nothing more than simple retracement levels. These levels are the only representative of where a security could have a price reaction, but nothing is etched in stone.

On the contrary, some day trading experts see these Fibonacci numbers as a short-sell strategy. For instance, if GE stock is at $21 and falls to $20.62, some Fibonacci traders may see the 38 cent drop as a good sign to short the stock.

While some financial experts are skeptical of the Fibonacci strategy, it has predicted other downturns before. In February before the COVID-19 crisis, the Dow Jones retraced about 50% before the economic crash. Andrew Adams is a technical analyst at Saut Strategy. He wrote in a research note that the pullback at that ratio meant an end to the previous bull market.

Before we go into the gritty details about Fibonacci trading strategies, it is worth our time to discuss the different types of fibonacci trading personas you might encounter. While mostly fictitious, these three personas do an awesome job of summarizing common trading practices.

Depending on what the market is offering, you might fluctuate between the low and high-volatility Fibonacci trader. Or, you may find yourself only using Fibonacci as an ancillary tool to support your trade plan thesis.

Fibonacci assists in seeing hidden levels of support and resistance to help you determine your entry and exit targets. To what degree you emphasize these levels depends upon your own conviction with the tool.

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