Fibonacci – The best trading tool!

Fibonacci

Fibonacci is one of the best technical tool as it is used by almost all traders - that's why it truly works!

It is useful in finding reversals for swing trading. It helps us to find swing lows in an uptrend, and swing highs in adowntrend.

The SEQUENCE

1,1,2,3,5,8,13,21,34,55

The Fibonacci Retracement Levels derived from the SEQUENCE

34/55 = 61.8%

21/55 = 38.2%

1/2 = 50%

13/55 = 23.6%

Trending Stocks will often retrace its move by a certain percentage, and that percentage is usually the FIBONACCI levels!

When a stock is rallying, it will retrace either 23.6% (only for very strong uptrend), 38.2%, 50% or 61.8% of its recent rally.

Look at the example below, BAC rose from $12.16 to $14.05 (that's the rally), then the stock started dipping.

This is where we use Fibonacci.

We draw the fib lines by extending it from the swing low $12.16 to the swing high at $14.05. The stock will most probably retrace to the 38.2% level, and it did. Look at the label a. the stock rose after retracing there.

However, the rally stalled, and the stock went back to that level and broke it downwards. It then retraced to the next fibonacci level 50% at b. And it bounced from there. We could see that the stock then made a run up to the 23.6% level before breaking down again, and it repeated again.

This means that Fibonacci lines are strong SUPPORT and RESISTANCE lines.

Note that Fibonacci retracement only help us to predict support and resistance lines.

IN AN UPTREND

We use Fibonacci retracement to help us find swing lows so that we can buy stocks there.

The stock may retrace to the 38.2% level and bounce off from there, however, there is no confirmation that this will continue the rally. The rally will only continue if there's a 1-2-3 pattern breakout, meaning that the stock breaks the top 0% level of the fibonacci line.

Otherwise, the rally might fail as seen in the BAC chart above.

In a DOWNTREND

Fibonacci can also be used in a downtrend. In this case, it will be used to find swing highs, so that we can short stocks there. You should get the idea. Otherwise, do contact me (link is at the left menu).

How to make the best out of FIBONACCI?

Use it together with WAVE theory and the other technical tools that I teach on this website.