Fibonacci Trading

Author: Dr. D. Selzer-McKenzie

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The Truth About Fibonacci Trading

The Truth About Fibonacci Trading

The truth about Fibonacci levels is that they are useful (like all trading indicators). They do not work as a standalone system of trading and they are certainly not the holy grail, but can be a very effective component of your trading strategy. But who is Fibonacci and how can he help you with your trading? Leonardo Fibonacci was a great Italian mathematician who lived in the thirteenth century who first observed certain ratios of a number series that are regarded as describing the natural proportions of things in the universe, including price data. The ratios arise from the following number series: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 .....

This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on. The ratios are derived by dividing any number in the series by the next higher number, after 3 the ratio is always 0.625. After 89, it is always 0.618. If you divide any Fibonacci number by the preceding number, after 2 the number is always 1.6 and after 144 the number is always 1.618. These ratios are referred to as the "golden mean." Additional ratios were then derived to create ratio sets as follows:

The Truth About Fibonacci Trading

Price Retracement Levels

0.236, 0.382, 0.500, 0.618, 0.764

Price Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618

The first set of ratios is used as price retracement levels and is used in trading as possible support and resistance levels. The reason we have this expectation is that traders all over the world are watching these levels and placing buy and sell orders at these levels which becomes a self-fulfilling expectation. The second set is used as price extension levels and is used in trading as possible profit taking levels. Again, traders all over the world are watching these levels and placing buy and sell orders to take profits at these levels which becomes a self-fulfilling expectation.

Most good trading software packages include both Fibonacci Retracement Levels and Price Extension Levels. In order to apply Fibonacci levels to price charts, it is necessary to identify Swing Highs and Swing Lows. A Swing High is a short term high bar with at least two lower highs on both the left and right of the high bar. A Swing

The Truth About Fibonacci Trading

Low is a short term low bar with at least two higher lows on both the left and right of the low bar.

Fibonacci Retracement Levels

In an uptrend, the general idea is to go long the market on a retracement to a Fibonacci support level. The price retracement levels can be applied to the price bar chart of any market by clicking on a significant Swing Low and dragging the cursor to the most recent potential Swing High and clicking there. This will display each of the Retracement Levels showing both the ratio and corresponding price level. Let's take a look at some examples of markets in an uptrend. The same points made by these examples are equally applicable to markets in a downtrend. Example 1: Here we plotted the Fibonacci Retracement Levels by clicking on the Swing Low at about $71.31 and dragging the cursor to the Swing High at about $89.83. You can see the resultant levels plotted by the software. Now the expectation is that if the market retraces from this high it will find support at one of the Fibonacci Levels, because traders will be placing buy orders at these levels as the market pulls back.

The Truth About Fibonacci Trading

5

Example 1

Example 1.1

The Truth About Fibonacci Trading

Example 1.1: Now let's look at what actually happened after the Swing High occurred. The market pulled back right through the 0.236 level and continued the next day through the 0.382 level before finding support. After a few days, the market resumed its upward move. Clearly buying at the 0.382 level would have been a good short term trade.

Example 2: Again, the Fibonacci Retracement Levels were plotted on the chart in the same manner as described in Example 1. Again, we are looking for the market to retrace from the Swing High and find support at one of the Fibonacci levels.

Example 2.1: Now let's look at what actually happened. The market again pulled back right through the 0.236 level and continued to pull back until it found temporary support at the 0.50 level (a lot of buyers at this level). However, once the buying power was exhausted, the market continued to retrace all the way down to the 0.764 level before resuming its upward trend. In this case, buying at the 0.764 level would have been a good short term trade.

The Truth About Fibonacci Trading

Example 2

Example 2.1

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Example 3: Here's another example. If the market retraces from the Swing High, where will it find support?

Example 3

The Truth About Fibonacci Trading

Example 3.1: Well, in this case the market found support at the 0.50 level. Buying at this level would have been a great trade as the market gapped up a few days later.

Example 3.1

The Truth About Fibonacci Trading

Example 4: Here's one more example.

Example 4

The Truth About Fibonacci Trading

Example 4.1: Whoops! The market gapped down through all levels of support and never looked back. A long trade here would have been a loser or at least an open lose position.

Example 4.1

You can see from these examples that the market often finds at least temporary support at the Fibonacci Retracement Levels - not always, but often. It should be apparent that there are a few problems to deal with here. First, there is no way of knowing which level will provide support. The 0.236 level seems to provide the weakest support, while the other levels provide support with approximately the same frequency. Second, the market will not always resume its uptrend after finding temporary support, but instead continue to decline below

The Truth About Fibonacci Trading

the last Swing Low. Thirdly, placement of stops is a challenge - it is probably best to place stops below the last Swing Low, but this requires accepting a high level of risk in proportion to the likely profit potential in the trade. Another problem is determining which Swing Low to start from in creating the Fibonacci Retracement Levels. One way is from the last Swing Low as we did in the examples. Another is from the lowest Swing Low of the past 30 days. The point is, there is no one right way to do it, and consequently it becomes a guessing game.

The Truth About Fibonacci Trading

Fibonacci Price Extension Levels

In an uptrend, the general idea is to take profits on a long trade at a Fibonacci Price Extension Resistance Level. The Price Extension Levels can be applied to the price bar chart of any market by clicking on a significant Swing Low and dragging the cursor to the most recent Swing High. Then by clicking on the Swing High and back down to the retracement Swing Low and clicking there. This will display each of the Extension Levels showing both the ratio and corresponding price level. Let's take a look at some examples of markets in an uptrend. The same points made by these examples are equally applicable to markets in a downtrend. Example 5: Here we plotted the Fibonacci Price Extension Levels by clicking on the Swing Low at about $38.20 and dragged the cursor to the Swing High at about $47.67 and then down to the retracement Swing Low. You can see the resultant levels plotted by the software. Now the expectation is that if the market continues higher it will find resistance at one of the Fibonacci Levels, because traders will be placing sell orders at these levels to take profits on there long trades. Example 5.1: Now let's look at what actually happened after the retracement Swing Low occurred. The market rallied making new highs pausing at the 0.382 level and again at the 1.000 level after a retracement down it rallied again going right through the 1.382 and 1.618 levels. Taking profits at the 0.382 level would have been premature, but taking profits at the 1.000 level would have made a nice trade.

The Truth About Fibonacci Trading

Example 5

Example 5.1

Example 6: Again, the Fibonacci Price Extension Levels were plotted on the chart in the same manner as described in Example 5. Again, we are looking for the market to continue higher before finding resistance at the Fibonacci Levels.

Example 6

The Truth About Fibonacci Trading

Example 6.1: Now let's look at what actually happened. The market rallied, making new highs and pausing between the 0.382 level and the 0.618 level, and then continued higher. This up move could well continue up to at least the 1.000 level. Taking profits at the 0.382 level would have been premature and only time will tell if taking profits at the 0.618 level was the optimal place to exit the long trade.

Example 6.1

The Truth About Fibonacci Trading

Example 7: Here's another example. Will the market continue higher to one of the Fibonacci Price Extension Levels?

Example 7

The Truth About Fibonacci Trading

Example 7.1: Well in this case the market found resistance at the 0.382 level which would have been the place to take profits on any long trades.

Example 7.1

The Truth About Fibonacci Trading

Example 8: Here's one more example.

Example 8.1

The Truth About Fibonacci Trading

Example 8.1: Like the last example, the market found resistance at the 0.382 level which would have been the place to take profits on any long trades.

Example 8.1

You can see from these examples that the market often finds at least temporary resistance at the Fibonacci Extension Levels - not always, but often. As in the examples of the Retracement Levels, it should be apparent that there are a few problems to deal with here as well. First, there is no way of knowing which level will provide resistance. The 0.382 level was a good level to cover any long trades in two of the examples, but in the other examples taking profits at that level would have been premature. Another problem is determining which Swing

The Truth About Fibonacci Trading

Low to start from in creating the Fibonacci Extension Levels.

One way

is from the last Swing Low as we did in the examples; another is from the lowest Swing Low of the past 30 days. Again, the point is that there is no one right way to do it, and consequently it becomes a guessing game. Alone, Fibonacci Levels will not make you rich. However, Fibonacci Levels are definitely useful as part of an effective trading method that includes other analysis and techniques. You see, the key to an effective trading system is to integrate a few indicators (not too many) that are applied in a way that is not obvious to most observers. All successful traders know it's how you use and integrate the indicators (including Fibonacci) that makes the difference. The lesson learned here is that Fibonacci Levels can be a useful tool, but never enter or exit a trade based on Fibonacci Levels alone.

Fibonacci Retracements and Extensions, and How to Profit From Them with Precise Entry and Exits!
Universal Origins
The Fibonacci sequence is a mathematical sequence in which each number, after two starting values, is the sum of the two preceding numbers. The sequence runs 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597

Dividing a Fibonacci number by its immediate predecessor yields an approximation of the Golden Ratio (roughly 1.6180327868852). The higher the Fibonacci number, the closer the approximation to the Golden Ratio becomes The sequence is named for medieval mathematician Leonardo of Pisa, commonly known as Fibonacci, who was responsible for introducing the Hindu-Arabic numeral system we currently use to Europe. Prior to Fibonacci, Roman numerals held sway. Fibonaccis namesake sequence stems from his solution to the

problem of modeling the growth of rabbit populations under ideal conditions, although it has since been used in many other contexts. Today Fibonacci numbers are used extensively in the study of mathematics, computer science and biology. The Golden Ratio shows up music, art and architecture and is often used as a guide for creating visually pleasing proportions. Perhaps because it is relatively easy to understand, the Fibonacci sequence is also frequently referenced in pop culture. For example, it makes a prominent appearance in The DaVinci Code as the password that opens the codex Trading Applications In finance, Fibonacci numbers, or more precisely the Golden Ratio, form the basis of a popular method of technical analysis. The idea is that in the aftermath of a significant price movement, subsequent levels of support and resistance will form around Fibonacci Significant numbers, usually 38.2%, 50% and 61.8%, which are percentages of the total price drop or gain.

After a large price movement, technical traders pay particular attention to these retracement levels. For example, if the price of a stock has recently shot up, a technical trader might sell until the price declined to the 38.2% level and begin buying when it reached the 61.8% level. Conversely, after a big decline, the same trader might buy until the price recovered to the 38.2% level and begin selling as the price approached the 61.8% level.

Fibonacci Extensions are, appropriately enough, an extension of the same idea. Technical traders have observed that after a period of retracement, stock prices often resume moving in accordance with their original trend. Extending the Fibonacci analysis allows technical traders to predict the next turning point. Fibonacci Extension levels are calculated based on the original price movement.

Having observed a major price increase in a stock, a technical trader might begin buying when the price had subsequently declined to the 61.8% level, then hold the stock until the price approached the 61.8% extension level, at which point it would be time to sell in anticipation of a new retracement. Extensions are applied in a similar manner for price declines, with the expectation being that after a retracement, the price decline will resume.

Fibonacci Effectiveness
There is not any strictly rational reason why stock prices should behave as Fibonacci analysis predicts. While it is true that the Golden Ratio appears frequently in nature, this does not in any way imply that we should expect it to play a role in financial markets. After all, rabbit population growth has very little to do with stock prices However, it would be a mistake to dismiss Fibonacci methods as useless superstition. The fact is that there are many active share traders who use Fibonacci retracements and extensions to guide their trading strategy. If enough traders use and act on Fibonacci analysis, the method will work, regardless of whether or not it has any rational basis. In the short term at least, even ill founded theories can move markets. Regardless of whether or not Fibonacci naturally influences the market, the use of this analysis by many traders leads to an overall selffulfilling prophecy in stock prices.

Phenomena like this are not uncommon in markets, and in fact, market psychology is a major focus of study in the field of Behavioral Economics. In essence, while Fibonacci retracements and extensions may not have any real basis from a strict financial analysis perspective, they are a useful tool for predicting the behavior of many traders operating in the market. For this reason, Fibonacci analysis can be an effective part of an overall trading strategy.

The key is to develop an understanding of how other traders are applying Fibonacci analysis. Target selection is also important. If past price movements of a stock appear to conform to Fibonacci predictions, then it is likely that traders using Fibonacci analysis are active in the trading of that particular stock. This in turn improves the odds that Fibonacci analysis will be effective in predicting the future movements of that stock. Applied with a thorough understanding of how and where other traders are using it, Fibonacci retracements and extensions can be solid enhancer of trading profits.

Who was Fibonacci?

Leonardo Pisano, was Italian mathematician born in Pisa during the The middle Ages. He was renowned as one of the most talented mathematicians of his day. . The name Fibonacci itself was a nickname given to Leonardo. It was derived from his grandfathers name and means son of Bonaccio. While most attribute the Fibonacci Sequence to Leonardo, he was not responsible for discovering the sequence. In 1202 Leonardo published a book called, Liber Abaci. In it he derived a method for calculating the growth of the rabbit population. Suppose a newly-born pair of rabbits, one male, one female, are put in a field. Rabbits are able to mate at the age of one month so that at the end of its second month a female can produce another pair of rabbits. Suppose that our rabbits never die and that the female always produces one new pair (one male, one female) every month from the second month on. The puzzle that Fibonacci posed was... How many pairs will there be in one year? At the end of the first month, they mate, but there is still one only 1 pair. At the end of the second month the female produces a new pair, so now there are 2 pairs of rabbits in the field. At the end of the third month, the original female produces a second pair, making 3 pairs in all in the field. At the end of the fourth month, the original female has

produced yet another new pair, the female born two months ago produces her first pair also, making 5 pairs. This mathematical progression is now recognized as the Fibonacci Sequence. Starting with zero and adding one, each new number in the sequence is the sum of the previous two numbers. In our example, 0+1 = 1, 1+1=2, 1+2=3, 2+3=5, and so on. The sequence of numbers looks like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, to infinity. From this sequence you can easily reason that at the end of one year there would be 233 pairs of rabbits. This sequence has repeatedly appeared in popular culture from architecture to music to television. While the series is a powerful tool, the analysis of one number with the number up to four places to the right. The first three are shown below. While some are not exact, if you repeat this mathematical analysis through multiple sets of data, you will see we arrive at some well known and fairly consistent ratios. 21/34 21/55 21/89 = 0.61764 ~ 0.618 = 0.38181 ~ 0.382 = 0.23595 ~ 0.236 34/21 55/21 89/21 = 1.61904 ~ 1.619 = 2.61904 ~ 2.619 = 4.23809 ~ 4.238

he dimensional properties adhering to the 1.618 ratio occur throughout nature and the ratio is most referred to as The Golden Ratio. The uncurling of a fern and the patterns found on various mollusk shells are commonly cited examples of this ratio. This number, when added to 0.618, equals 1. These ratios have been used for over a hundred years in the financial markets by the likes of W.D. Gann and Ralph Nelson Elliot. Up until the late 90s the tracking and use of these numbers were a manual process. With the proliferation of real-time charting and data, software that automatically calculated and displayed these levels brought Fibonacci into the financial mainstream.

Fibonacci as a Technical Analysis Tool

While there have been countless books and articles written on the use of Fibonacci in technical analysis, the basics are simple.

On the price scale, these ratios, and several others related to the Fibonacci sequence, often indicate levels at which strong resistance and support will be found. Many times, markets tend to reverse right at levels that coincide with the Fibonacci ratios. On the time scale Fibonacci ratios are one method of identifying potential market turning points. When Fibonacci levels of price and time coincide you have high probability entry points. In the next few pages I will talk about how I use the two most common applications of Fibonacci:

Price Retracements A strategy for quality entry points Price Extensions An approach to determining how far price will run

Then after we have covered the basics we will talk about bringing it all together and using both Fibonacci Retracements and Fibonacci Extensions at same time and how clustering of these ratios increases the probability of profit.

Fibonacci Retracements:
The Fibonacci Retracement is probably the most heavily used Fibonacci tool in the toolset. You will find Fibonacci Retracements as a solid tool in identifying key support and resistance areas. If prices have fallen from a recent swing high down to a swing low, the expectation is that price should retrace distance, high to low, by a ratio of the Fibonacci sequence. . I have Fibonacci Retracements successfully used on tick charts through monthly and yearly charts. It is important to note, the larger price move from swing high to swing low, the more accurate the retracement projections. Identification and selection of the correct swing points are keys to success. While there are many variations of the ratio set, simple is better, lets focus on four major retracement levels.

23.6% -- The shallowest of the retracements. In very strong trending markets price typically quickly bounces in the area of this ratio. 38.2% --- This is the first line of defense of the current trend. Breaking this level starts to erode the underlying trend.

50% -- the neutral point of any retracement. This is the critical tipping point. 61.8% -- retracing to this typically signals a breakdown in the trend. 100% -- matching the move

n this section we will also show examples of how potential opportunities when price retraces beyond 100% by following another set of Fibonacci ratios:

138.2% 161.8% 200%

Notice in each case we have simply added 100% to the standard ratio set. I use this set of retracements on a daily basis, from 23.6% all the way to 200% and sometimes 300% For my style of trading I find 38.2%, 50% and 61.8% quite reliable.I use the other primarily as confirmation levels. So lets take a look at some examples of Fibonacci Retracements in use.

Example 1: Take the example below. The EUR/USD had risen from 1.3360 to 1.4278. The next day the EURUSD failed to make a new high and the potential swing point was in place. So I using swing points I placed a Fibonacci retracement on my chart

The trend was obviously very strong and the first retracement to the 23.6% level was met with a violent change in direction. You can see the dip below the 23.6% level and the sudden reversal. While there are multiple entry methods, the most conservative would be to wait until the level is penetrated and price establishes itself above that level and enter on the open of the next bar as shown.

With the right money management, you can see in this example this could have been a serious winner. Figure 3

Once you understand the method you can find countless examples. Every market, FOREX, Equities and Futures each exhibit these patterns to some degree. Example 2: Lets look at another example using the USDCAD. You can see in this example there are multiple entry points for both trend and countertrend trades.

Figure 5 Lets zoom in and look at the area highlighted in blue. Fibonacci Ratios work on virtually any size price swing.

The chart below shows the Fibonacci Retracement applied to the smaller price swing. Figure 6

The blue ellipses show the high potential entry points. Notice, in each of these cases you could have entered the market with a relatively tight stop loss with high reward potential. Ok, we have shown some examples of well behaved price action. What happens if price retraces 100%? How far can it go beyond this point? Fibonacci ratios provide some clues to answering this question and finding low risk entry points. Example 3: The example below shows the GBPUSD making a bottom and bouncing back. And multiple entry points from the same set Fibonacci Retracement levels

Of note are the high potential entry points at 38.2%, 50% and 61.8%. Each of these could have been entry points with solid profit potential. However, notice after the initial breakout above 100%, there were other opportunities to get in the trade. Ultimately price jumped to the 138% point before backtracking. This example shows yet another way to use Fibonacci Retracements. This example shows why it is valuable to identify potential levels above and beyond the initial 100% retracement. Retracements are the cornerstone of Fibonacci theory as it applies to the financial markets. Hopefully these examples have provided guidance from which to draw your own retracements and expand your trading toolset. To recap, while there are other retracement values, my defaults Fibonacci Retracements always include: 23.6% 38.2% 50% 61.8% 100% 138.2% 161.8% 200%

You can never tell when price action it going blow well beyond the 100% level.

Fibonacci Price Extensions:

Picking a high potential entry point is half the battle. How do we know what kind of move price is expected to make? Projecting price movement beyond the swing points is the answer everyone seeks. In our first example we entered a long position on the 23.6% retracement from the swing high. How far can we expect the position to run? In Example 3, we identified 3 potential entry points. Now it is time to figure out possible exit points. Fibonacci Extensions take into account three price points. A swing high and swing low, plus the swing point where price reversed from a retracement. Like Fibonacci Retracements, I use exactly the same set of Fibonacci levels when using Fibonacci Extensions. Lets go back and look at our first example. We see in figure 3 the trade could have been a big winner, but how would we figure out potential exit points? Fibonacci Extensions!

I find Fibonacci Extensions the most useful as a money management tool.

The last thing we want to do is turn a winner into a loser. As price moved above the 23.6% level, I would start to bring my stop loss up in trail. Accordingly, I would continue to raise my stop as price increased. The level of risk is entirely up to your trading plan, but tools like Fibonacci Extensions help identify key levels from which stops can be placed. You can see in the next chart, Figure 9, that after price penetrated the 100% Fibonacci Extension level, we entered into a period of consolidation. While during the consolidation there were obvious entry points, however, remaining in the initial trade would have proven to be frustrating.

In Figure 7 we found the GBPUSD creating a bottom and breaking out to the upside. We also identified 3 potential entry points. Lets look at each of the entry points and use Fibonacci Extensions to project profit targets. In the first trade we entered the market thinking that a swing low was in place off the 38.2% Fibonacci Retracement level. You can see in Figure 10, while price did bounce to the 23.6% Fibonacci Extension level. It was enough to make a profit, but it was not a major winner. This is a trade that once you did not see a continuation through the 23.8% level, you could have take that as a cue to exit the

position. Or at the very least move you stop up to maintain some level of profit.

Moving on to the second entry point, we sold short at the 50% Fibonacci Retracement level.

This was obviously a solid entry point. On the way down you can clearly see opportunity to tighten up your stop loss values. There are many ways to manage a trade like this without being overly tight with your stops. In fact some would have taken profit at the 23.6% Fibonacci Extension level. I believe that taking profit at any of the levels would have been a prudent strategy. Now lets look at the final entry point from our Figure 7 example. This trade was by far the most troubling. Even the correct entry could have been painful. However, if you did stick it out, there were multiple exit points based on the Fibonacci Extensions.

he 61.8% level would have been an ideal exit. That said after the prior ride, I would not fault anyone for taking profit sooner, especially the 23.6% level. We will discuss more on that in the next section. Now we have gone through both Fibonacci Retracements and Extensions. As you would expect using them together can be an incredibly powerful tool.

Fibonacci Clustering:
In our previous examples we have seen how both Fibonacci Retracements and Fibonacci Extensions can be powerful tools on their own. Often, I use multiple Fibonacci Retracements to determine entry and exit points. And then also combine Fibonacci Extensions.

Lets look at an example where using multiple Fibonacci Retracements prove very useful. In Figure 13 we see the dramatic fall of the USDCAD that we looked at from a different perspective in Figures 4, 5 & 6.

n the figure above I have added two Fibonacci Retracements. Take special note to the two areas highlighted. These areas identify clusters of Fibonacci levels. The bounce off the bottom blew directly though the first cluster of 23.6% and 38.2%. In subsequent retracements, this level became support and you could have safely used it as a very low risk entry point. Additionally, the 38.2% and 61.8% cluster became resistance. In two of three cases you could have used this information for low risk short side entry points.

The key to remember in this example: You had all this information immediately after the swing low was established. Therefore knowing these levels this early in the swing allows these levels to be predictive Now lets add one more Fibonacci Retracement.

In the figure above I have added a third Fibonacci Retracement. For the patient trader, the third set Fibonacci Retracement levels provides more confidence that both Point A and Point B are high quality and low risk entry points from the long side. After practicing this method for a while, you will find it common for you charts to have multiple Fibonacci Retracements. Learning to create and read Fibonacci Retracement clusters is a powerful and valuable tool for your Fibonacci Toolset. You can also cluster multiple Fibonacci Extensions. In Figure 15 you see this in action.

In this chart you see two different sets of Fibonacci Extensions applied. As you can see there are four, two level groups. Each of these groups represents low risk entry points. Ideally, you would want to initiate the position somewhere between the two levels. Additionally, with this type of setup, you can almost trade from pair to pair. As you can see by the previous two examples, it would be very easy to draw countless retracements and extensions on virtually any chart. It really depends on the chart and the price action.

In Figure 7 we looked at the Bottoming of the GBPUSD using one basic Fibonacci Retracement. Lets revisit GBPUSD on a bigger scale and add to our thesis. In our next chart I have added a larger Fibonacci Retracement that encapsulates the entire top to bottom move and I have added a Fibonacci extension from the high and low swing points within the retracement price action. These additions are shown on our chart below.

Take special notice of the Fibonacci clusters highlighted. Each of these clusters served as either support or resistance points. And each created a tradable opportunity.

Summary:
Fibonacci ratios are one of the most commonly used techniques in technical analysis of the financial markets. If you are already a successful trader or a trader just starting out, Fibonacci Retracements provide valuable insight and triggers on where high probability change will happen. The Fibonacci Retracement is likely the most common of all Fibonacci related tools. While there are many variations of the ratio set, I think simple is better.

23.6% -- The shallowest of the retracements. In very strong trending markets price typically quickly bounces in the area of this ratio. 38.2% --- This is the first line of defense of the current trend. Breaking this level starts to erode the underlying trend. 50% -- the neutral point of any retracement. This is the critical tipping point. 61.8% -- retracing to this typically signals a breakdown in the trend.

100% -- Matching the initial move 138.2% 161.8% 200%

Within this set, 38.2%, 50% and 61.8% I find quite reliable. I use the others as more confirmation and as part of cluste

The Fibonacci Extension is less common but just as powerful when correctly applied. Used as part of a money management strategy and as profit target projection tool, Fibonacci Extensions provide guidance on where price will potentially stall or change direction. Used in combination, these two ratio sets provide very tradable indicators of opportunity. If you then combine Fibonacci with other indicators like oscillators and moving averages, you can quickly identify high potential risk/reward opportunities. While not perfect, they are one of the best tools available. Dr. D. Selzer-McKenzie The Author