Let’s take a look at Fibonacci Retracement Lines and see how they can be used to help us win at trading the financial markets.
One interesting thing about using Fibonacci Retracement Lines is that they fall into the group of technical indicators that attempt to predict what price the market is going to move to.
This is different to many other popular technical indicators, such as the EMA, MCAD and Bollinger Bands which all attempt to guess the market determined upon what recent price movements.
Unlike Fibonacci Retracement Lines, These indicators tend to provide the trader with information as to whether the market will be going up or down.
When we look at how Fibonacci Retracement Lines work on a chart we can see that we are being given the actual price that the stock will (possibly) move to.
The placement of the lines come from the famous Fibonacci number sequence that Leonardo Fibonacci da Pisa created on a trip to Egypt. This number sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, etc.. To continue the sequence, just add the last 2 numbers to create the next in the sequence.
From this sequence of numbers, you are able to calculate ratios. The ratios that are commonly used to calculate Fibonacci Retracement Lines are .382, .500 and .618.
To use these ratios, you must find the beginning and end of an uptrend or a downtrend. Then, from the most recent price, we can calculate the values to where the trend may retrace.
For instance, if a stock trends from $100.00 to $110.00, then we can find that the price movement for the trend is $10. Therefore we can now calculate that the Fibonacci Retracement Lines would be:
- $10.00 x 0.382 = $3.82 = $110.00 – $3.82 = $106.18
- $10.00 x 0.500 = $5.00 = $110.00 – $5.00 = $105.00
- $10.00 x 0.618 = $6.18 = $110.00 – $6.18 = $103.82
So how can this information be used? Well, there is no sure way, but many traders would use the values to place their stop losses or buying points, or to identify that a trend is established.
Like all trading methods, you must be sure to research thoroughly how you plan to use them. Fibonacci Retracement Lines are no exception. If you fancy seeing if you can implement them into your trading style, then make sure you do some further research and testing.