Fibonacci Retracement Levels

Learn to profitably use Fibonacci Retracements Levels by identifying with a better degree of certainty the support and resistance levels for your stock

Support and Resistance Indicators
Fibonacci Retracement Tool Explained

Learn how the Fibonacci Retracement tool can help you identify the retracement levels for your stock

Stocks don’t move up or down indefinitely.  A stock that is on its way up will eventually get tired; traders that have profited from the stock’s upward movement will eventually get nervous and want to take some profits before resuming their bullish sentiments.  On the other hand, stocks that are on their way down will eventually be seen as a buying opportunity; traders that have lost money or traders who have shorted and profited from the stock’s downward movement will eventually want to find the the support level from where the stock might reverse its decent.

Well defined support and resistance levels can be found using the fibonacci retracement tool.  The tool is used by drawing a line between the low and high value point for a stock if it was going up;  If the stock was going down, the tool is used by drawing a line between the high and low value point for the stock as it was going down.  

Through a series of mathematical calculations ( described later ), the tool will trace out lines that represent magical and accepted retracement levels at 23.6, 38.2, 50, 61.8, and 78.6% retracements.  

That is, if you think that the stock has peaked in it upward run and is moving down, the fibonacci retracement tool will suggest the next support level to which the stock might fall.  This level can often be confirmed by identifying where the stock had found support or resistance in the past.  It is amazing that previous support and resistance levels will often be along the same line as the fibonacci retracements

 

 

Support and Resistance Indicators

What are the Origins of Fibonacci Levels

Fibonacci numbers are not only used in stock trading.  The numbers were first derived from a number series that was discovered in the 13th century ( before the birth of wall street ) by Italian mathematician Leonardo of Pisa—also known as Fibonacci.  The Fibonacci sequence is the following

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…

  • Each new number is the sum of the two numbers before it. 
  • Each number is approximately 61.8 percent of the next number
  • Each number is approximately 38.2 percent of the following number, and
  • Each number is  approximately 23.6 percent of the number after that. 
  • If you subtract 23.6 from 100, the result is 76.4.
  • The ratio you get from dividing any adjacent number into the other ( for example, 8/13 ) approaches the number 1.618, or its inverse, 0.618. This is known as the golden ratio.
  • These numbers then are the Fibonacci retracement levels: 76.4, 61.8, 38.2, and 23.6.

Support and Resistance Indicators

The Fibonacci Sequence and Ratios Can Be Found in Many Places in Nature

  

As it turns out, the Fibonacci sequence and ratios are found in many places in nature ranging from the range of the rings of seashells, flowers, and even the spirals of galaxies.  The ratio can even be found in defining what makes facial proportions beautiful.

Support and Resistance Indicators

How do you use Fibonacci Retracement Levels?

If you are looking for the downward retracement of a upwardly mobile stock

  • Draw a line between the lowest point and the highest point movement of the stock
  • The retracement tool will draw levels for retracements of 78.6, 61.8, 50, 38.2, and 23.6 percent.
  • Independently search out other support and resistance levels based on historical candlesticks to confirm that the retracement levels have some validity.  
  • If the fibonacci retracement level corresponds to a historical retracement level, then you have a higher assurance that your stock might fall to this support level.
  • Remember that nothing is ever 100% certain

Support and Resistance Indicators

How can Fibonacci Levels be self-fulfilling

Fibonacci Retracement Levels can often be extremely accurate because they are in some ways, self-fulfilling.  Remember that you are not trading in a vacuum.  Other traders are also in search of support and resistance levels; and because the fibonacci retracement tool is a popular one, the support and resistance levels that it identifies might eventually become true support and resistance levels as more traders identify the same points.

Option Basics

How Does a Call Option Change with Volatility and Time

A call option will benefit from :

  • A rise in stock prices
  • A rise in volatility
  • An early rise in stock price ( time kills the stock value )

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