Fibonacci Retracement
FIBONACCI RETRACEMENT IDENTIFYING POTENTIAL REVERSAL LEVELS
INTRODUCTION • • • • •
What is Fibonacci retracement? Where do they come from? Alert Zones Common Retracements Fibonacci Extensions
WHAT IS FIBONACCI RETRACEMENT? • Popular tool among technical traders • Ratios used to identify potential reversal levels, including potential targets • Applied after an advance or a decline in price to define retracement levels and forecast the extent of a correction or pullback / bounce • Created by taking 2 extreme points, usually a major peak and trough on a chart and dividing the vertical distance by the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.08%, and 100% • These levels identify possible support and resistance levels • Note: 50% is NOT really a Fibonacci ratio (nor is 78.6%)
WHERE DO THEY COME FROM? • Based on sequential numbers identified by mathematician Leonardo Fibonacci • 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. (to infinity) • They are the sum of the 2 preceding terms • Each number is approximately 1.618 times greater then the preceding number, thus providing the “golden ratio” of 61.8% (eg: 55/89 = 0.6179) • The 38.2% is found by dividing one number by another 2 places to the right (eg: 55/144 = 0.3819)
• These ratios seem to play an important role in the stock market, just as they do in nature
PROVE IT!! • Mathematicians and scientists have known this ratio for years • Take honeybees: if you divide the female bees by the male bees in any given hive, you will get 1.618 • Sunflowers: opposing spirals of seeds have a 1.618 ratio between the diameters of each rotation • Head to feet: measuring the distance and dividing it by length of belly button to feet results in 1.618
ALERT ZONES • Retracement levels alert traders of a potential trend reversal, resistance area or support area. • Retracements are based on the prior move. • A bounce is expected to retrace a portion of the prior decline • A correction is expected to retrace a portion of the prior advance. • Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring.
RULES • Discriminate the high and the low very well • Especially in smaller time frames
• Can be used in any time frame • Do not rely on Fibonacci alone • Greater confidence and confirmation occurs with candlestick reversal pattern • Remember to adjust if levels are breached
Bullish Engulfin g
Bullish Engulfin g
Piercin g
Piercin g
Piercin g Bullish Engulfin g
Piercing
Inverted Hammer Rising Window
Bull Sash
Bull Sash
Bull Engulf near 62%
Hammer
Chart courtesy of Genesis FT
50% retracement
FIBONACCI EXTENSIONS • Extensions consist of all levels drawn beyond the standard 100% level • Used by many traders to determine areas where they will wish to take profits. • The most popular extension levels are 127.2% and 161.8% • 127.2% has 70-90 percent probability • 161.8% has 50-70 percent probability
• In practice, most traders use Fibonacci extensions in combination with other technical indicators/patterns to help them determine appropriate target prices.
CONCLUSION • Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. • Corrections and counter-trend bounces often retrace a portion of the prior move. • While short 23.6% retracements do occur, the 38.2-61.8% covers the more possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone.
• Other technical signals are needed to confirm a reversal. • Reversals can be confirmed with candlesticks, momentum indicators, volume or chart patterns. In fact, the more confirming factors the more robust the signal.
INTRODUCTION • • • • •
What is Fibonacci retracement? Where do they come from? Alert Zones Common Retracements Fibonacci Extensions
WHAT IS FIBONACCI RETRACEMENT? • Popular tool among technical traders • Ratios used to identify potential reversal levels, including potential targets • Applied after an advance or a decline in price to define retracement levels and forecast the extent of a correction or pullback / bounce • Created by taking 2 extreme points, usually a major peak and trough on a chart and dividing the vertical distance by the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.08%, and 100% • These levels identify possible support and resistance levels • Note: 50% is NOT really a Fibonacci ratio (nor is 78.6%)
WHERE DO THEY COME FROM? • Based on sequential numbers identified by mathematician Leonardo Fibonacci • 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. (to infinity) • They are the sum of the 2 preceding terms • Each number is approximately 1.618 times greater then the preceding number, thus providing the “golden ratio” of 61.8% (eg: 55/89 = 0.6179) • The 38.2% is found by dividing one number by another 2 places to the right (eg: 55/144 = 0.3819)
• These ratios seem to play an important role in the stock market, just as they do in nature
PROVE IT!! • Mathematicians and scientists have known this ratio for years • Take honeybees: if you divide the female bees by the male bees in any given hive, you will get 1.618 • Sunflowers: opposing spirals of seeds have a 1.618 ratio between the diameters of each rotation • Head to feet: measuring the distance and dividing it by length of belly button to feet results in 1.618
ALERT ZONES • Retracement levels alert traders of a potential trend reversal, resistance area or support area. • Retracements are based on the prior move. • A bounce is expected to retrace a portion of the prior decline • A correction is expected to retrace a portion of the prior advance. • Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring.
RULES • Discriminate the high and the low very well • Especially in smaller time frames
• Can be used in any time frame • Do not rely on Fibonacci alone • Greater confidence and confirmation occurs with candlestick reversal pattern • Remember to adjust if levels are breached
Bullish Engulfin g
Bullish Engulfin g
Piercin g
Piercin g
Piercin g Bullish Engulfin g
Piercing
Inverted Hammer Rising Window
Bull Sash
Bull Sash
Bull Engulf near 62%
Hammer
Chart courtesy of Genesis FT
50% retracement
FIBONACCI EXTENSIONS • Extensions consist of all levels drawn beyond the standard 100% level • Used by many traders to determine areas where they will wish to take profits. • The most popular extension levels are 127.2% and 161.8% • 127.2% has 70-90 percent probability • 161.8% has 50-70 percent probability
• In practice, most traders use Fibonacci extensions in combination with other technical indicators/patterns to help them determine appropriate target prices.
CONCLUSION • Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. • Corrections and counter-trend bounces often retrace a portion of the prior move. • While short 23.6% retracements do occur, the 38.2-61.8% covers the more possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone.
• Other technical signals are needed to confirm a reversal. • Reversals can be confirmed with candlesticks, momentum indicators, volume or chart patterns. In fact, the more confirming factors the more robust the signal.
