Fibonacci Lines – The Basics Fibonacci price projections are unique ratios that can predict important future price levels based on past price action. Some of the ratios used are .236, .382, .50, .618, .786, 1.0, 1.382, 1.618, 2.0 and 2.618. We use “Price Swings” on a chart as “Pivots.” By multiplying the price difference between the pivots by a “Fib Ratio,” we can calculate the significant price levels above and below where the market is currently trading. When constructing these fib lines (prices) from different sets of pivots from the same chart, often there is a price or price zone where 2 or more fib lines cluster tightly together in CONFLUENCE. These areas of confluence are even more powerful as we continually “map out” the significant fib levels. By constructing these fib levels on multiple time frames (ex. 5-minute, 15-minute, 58-minute charts), we further enhance the effectiveness of the fib level confluences that we identify. While some of the fib work is based on RETRACEMENTS between swing highs and swing lows (pivots), we focus more on projecting EXTENSIONS and EXPANSIONS. These tend to mark an “Exhaustion” price or zone where the market will have expended/exhausted its directional move. We use these significant fib levels to guide our trading. Using them as a trade entry, we typically will trade a REACTION off a significant fib price level as long as we include other Confirming Factors. But the fib levels may also function as CFs to bolster another primary trade entry signal. Fib prices can help hone our exit from a trade that we are currently holding. Since the market tends to react off these prices as support and resistance, if we are still in a long trade, we may wish to exit as we near a significant fib line that was above the market. Also, fib levels show Role Reversal. If resistance is penetrated it becomes support and vice versa. There are 4 primary types of Fibonacci Projections that we use: 1. 2. 3. 4.
Extensions Alternates Expansions Retracements
The following diagrams show an example of each, describing how it is calculated. These examples have the SWING LOW (Pivot #1) followed by the SWING HIGH (Pivot #2). The diagrams would simply be inverted to show and calculate a SWING HIGH (Pivot #1) followed by a SWING LOW (Pivot #2). Again, these are simply “the basics” for understanding fibs so that we can better construct key fib techniques.