Fibonacci retracements & projections
Even in a trending market, either up or down, price does not move in a straight line, there will be numbers of short-term countertrend price movement known as pullbacks and corrections in different magnitude before the prevailing trend resumes.
Experienced traders know that in order to enhance profitability and make a trade less risky, the best way is to enter a position at the end of the correction. Therefore, technique in predicting the retracement level becomes extremely useful in formulating a trading strategy and technical analysts consider the Fibonacci percentages are very effective ways to locate the possible retracement level especially when the actual chart support and resistance levels are too far away.
Leonardo Fibonacci was an Italian mathematician who first observed certain ratios of a number series which can describe the natural proportions of things in the universe. The Fibonacci numbers are the following sequence of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 ……
The first two Fibonacci numbers are 0 and 1, then the Fibonacci sequence is formed by getting the sum of the two previous numbers to obtain the next number.
The number sequence generates some mathematical relationship and the most well known and widely used is the ratio of any number to its next higher number which approaches a constant value of 0.618 (e.g. 13/21 is 0.619, 55/89 is 0.6179, 377/610 is 0.61803 and the higher pair of number you get, you will have a result closer to 0.618). Another percentage is the ratios of alternate numbers which approaches a constant value of 0.382 (e.g. 13/34 is 0.3823, 55/144 is 0.3819, 377/987 is 0.382, again the higher pair of number you use, you will get a result closer to 0.382). In addition, 0.382 is also the inverse of 0.618 (1-0.618=0.382). Finally is the ratio of 0.5, which only occurs between the relation of the 2 numbers 1 and 2, nevertheless, this ratio is also considered as one of the very important Fibonacci ratio especially in technical analysis.
These Fibonacci percentages / ratios, 0.382, 0.5 and 0.618 can be very useful especially for swing traders in order to identify the pivot points on the chart. In an uptrend, whenever a pullback takes place, which should be treated as golden opportunity to enter long position and these percentages can be applied to predict the retracement level (i.e. where you can set your entry point) or identify Fibonacci support level which should contain the correction (i.e. where you can put your stop-loss). The following diagram explains the retracement patterns of 3 major Fibonacci percentages and same principle also applies to downtrend.
In a rising market, after meeting certain resistance level, point (A), when correction unfolds, it is quite common for price to find support at these three Fibonacci retracement levels. In a fast market, pullback tends to be shallow and normally only reaches 38.2% of the nearest upmove before turning north again. Some people consider this as the first line of defense, once this level is penetrated, this implies a deeper correction of the underlying trend has commenced.
Another well known percentage is the 50 percent retracement, no matter is a primary, secondary or intermediate trend, correction against a major uptrend often retraces approximately 50% of the prior uptrend as it is quite common for half of the participants to take profit after certain temporary top is formed.
Last but surely not least, is the famous 61.8% Fibonacci percentage, in a weak trend, it is not uncommon to see this percentage of correction, this point is also considered as the maximum retracement level which is allowed if the prior trend is going to resume. Once this level is broken, a break of 61.8% retracement, it usually warns of a reversal rather than a retracement is taking place.
Whilst there are no fixed rules in applying Fibonacci retracement, we do have some useful guidelines which should help enhancing the accuracy in predicting the pullback or correction levels.
Experienced traders know that in order to enhance profitability and make a trade less risky, the best way is to enter a position at the end of the correction. Therefore, technique in predicting the retracement level becomes extremely useful in formulating a trading strategy and technical analysts consider the Fibonacci percentages are very effective ways to locate the possible retracement level especially when the actual chart support and resistance levels are too far away.
Leonardo Fibonacci was an Italian mathematician who first observed certain ratios of a number series which can describe the natural proportions of things in the universe. The Fibonacci numbers are the following sequence of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 ……
The first two Fibonacci numbers are 0 and 1, then the Fibonacci sequence is formed by getting the sum of the two previous numbers to obtain the next number.
The number sequence generates some mathematical relationship and the most well known and widely used is the ratio of any number to its next higher number which approaches a constant value of 0.618 (e.g. 13/21 is 0.619, 55/89 is 0.6179, 377/610 is 0.61803 and the higher pair of number you get, you will have a result closer to 0.618). Another percentage is the ratios of alternate numbers which approaches a constant value of 0.382 (e.g. 13/34 is 0.3823, 55/144 is 0.3819, 377/987 is 0.382, again the higher pair of number you use, you will get a result closer to 0.382). In addition, 0.382 is also the inverse of 0.618 (1-0.618=0.382). Finally is the ratio of 0.5, which only occurs between the relation of the 2 numbers 1 and 2, nevertheless, this ratio is also considered as one of the very important Fibonacci ratio especially in technical analysis.
These Fibonacci percentages / ratios, 0.382, 0.5 and 0.618 can be very useful especially for swing traders in order to identify the pivot points on the chart. In an uptrend, whenever a pullback takes place, which should be treated as golden opportunity to enter long position and these percentages can be applied to predict the retracement level (i.e. where you can set your entry point) or identify Fibonacci support level which should contain the correction (i.e. where you can put your stop-loss). The following diagram explains the retracement patterns of 3 major Fibonacci percentages and same principle also applies to downtrend.
In a rising market, after meeting certain resistance level, point (A), when correction unfolds, it is quite common for price to find support at these three Fibonacci retracement levels. In a fast market, pullback tends to be shallow and normally only reaches 38.2% of the nearest upmove before turning north again. Some people consider this as the first line of defense, once this level is penetrated, this implies a deeper correction of the underlying trend has commenced.
Another well known percentage is the 50 percent retracement, no matter is a primary, secondary or intermediate trend, correction against a major uptrend often retraces approximately 50% of the prior uptrend as it is quite common for half of the participants to take profit after certain temporary top is formed.
Last but surely not least, is the famous 61.8% Fibonacci percentage, in a weak trend, it is not uncommon to see this percentage of correction, this point is also considered as the maximum retracement level which is allowed if the prior trend is going to resume. Once this level is broken, a break of 61.8% retracement, it usually warns of a reversal rather than a retracement is taking place.
Whilst there are no fixed rules in applying Fibonacci retracement, we do have some useful guidelines which should help enhancing the accuracy in predicting the pullback or correction levels.