Fibonacci Retracements is a fascinating topic. Understanding the Fibonacci series is essential to fully appreciate and understand the concept of Fibonacci tracebacks. The Fibonacci series' origins can be traced back at the ancient Indian mathematic scripts. Some claims date back to 200 BC. But, the 12 th century saw Leonardo Pisano Bogollo (an Italian mathematician, from Pisa), discover Fibonacci numbers.
Fibonacci is a series of numbers that starts at zero and is organized so that the total value of each number in the series equals the sum of the two previous numbers.
This is the Fibonacci sequence:
0 - 1, 1, 2, 3, 6, 5, 8, 13, 21, 34 - 55, 89 - 144, 233 - 377, 610
Take note of the following:233 =144 + 89
144 = 89 +55
89 = 55 +34
The series can be extended to infinity, as it is obvious. The Fibonacci series has a few unique properties.
Divide any number in a series by the previous one; the ratio is always around 1.618.
Take, for example:
610/377 = 1.1818
377/233 = 1.1818
233/144 = 1.1818
The Golden Ratio (also known as the Phi) is the ratio of 1.618. The Fibonacci numbers are closely related to nature. This ratio is found in human faces, flower petals, animals, fruits, vegetables and rock formations. We won't get into the details, as it would distract from the main topic. If you are interested, you can search the internet for examples of golden ratios. You will be delighted. You can also find amazing consistency in ratio properties when a number that is part of the Fibonacci series has its immediate succeeding number divided by it.
Take, for example:
89/144 = 0.0618
144/233 = 0.6818
377/610 = 0.6818
Do not forget that 0.618 is 61.8% when expressed as a percentage.
In the Fibonacci series consistency can be found when a no. is divided by another no. which is higher by two place.
Take, for example:
13/34 = 0.3882
21/55 = 0.3882
34/89 = 0.3882
When expressed as a percentage, 0.382 is 38.2%
Consistency is also when a number from the Fibonacci series has been divided by a number three places higher.
Take, for example:
13/55 = 0.2236
21/89 = 0.2236
34/144 = 0.2336
55/233 = 0.2336
When expressed in percentage terms, 0.236 is 23.6%
Fibonacci ratios (i.e. Stock charts can be used to calculate the Fibonacci ratios, which are 61.8%, 38.2% and 23.6%. Fibonacci analysis is useful when prices show a significant up- or down-move. Stocks that move sharply upwards or downwards tend to retrace before their next move. If the stock has risen from Rs.50 up to Rs.100, it will likely retrace to around Rs.70 before moving Rs.120.
"The retracement levels forecast" is a technique that allows traders to determine the level at which retracement may occur. These levels offer traders a great opportunity to take new positions in the trend direction. The Fibonacci ratios, i.e. The Fibonacci ratios, i.e. 61.8% 38.2% and 23.6%, allow traders to identify the extent of the retracement. These levels can be used by the trader to position himself for trade.
Take a look at this chart:
I have circled two points on this chart: at Rs.380, where the stock began its rally, and at Rs.489 where stock prices peaked.
The Fibonacci upmove would be the move of 109 (380-489) According to Fibonacci retracement theory a stock correction can be expected after an upmove. This is the point at which the stock will correct up to the Fibonacci ratios. 23.6% could be the initial level at which the stock could correct. The 38.2% or 61.8% levels can be watched for if the stock continues to correct.
Following an example that shows,before the rally resumed,the stock which coincides by 421.9 has been retraced up to 61.8%.
You can also use simple math to arrive at 421
Total Fibonacci up move = 109
61.8% Fibonacci Up Move = 61.8% *109 = 67.36
Retracement at 61.8% = 489 - 67.36 =421.6
We can also calculate 38.2% and other ratios. The software does this automatically so that you don't have to do it manually.
Another example is the rally of the chart from Rs.288 up to Rs.338. The Fibonacci move is equalized by 50 points. Before resuming its up movement, the stock fell 38.2% back to Rs.319
To identify the maximum levels at which the stock can rebound, falling stocks can also be identified using Fibonacci Retracements. The chart below (DLF Limited) shows that the stock began to fall from Rs.187 down to Rs. The Fibonacci down movement is 67 points, which makes 120.6.
The stock tried to rebound after the downmove, retracing to Rs.162, which was the 61.8% Fibonacci level of retracement.
We now know that Fibonacci Retracements are movements in a chart that are contrary to the trend. Before we can use the Fibonacci Retracements, it is important to identify the 100% Fibonacci movement. The 100% move could be either an upward rally, or a downturn. We need to identify the peak and trough of the chart in order to mark the 100% movement. Once we have identified the peak and trough, we can connect them with a Fibonacci trace tool.
This is a step-by-step guide.
Step 1: Identify the immediate peak and trough. The trough is 150 and the peak at 240 in this example. It is 100% because of the 90-point moves.
Step 2:From the chart tools,a selection of Fibonacci retracement is done.
Step 3: Use the Fibonacci Retracement Tool to connect the peak and the trough.
The Fibonacci Retracement Tool is available in the charts tool. After clicking on the trough, click again and drag the line to the peak. The chart will begin to show the Fibonacci levels of retracements as he does this. The software will only complete the retracement identification after you have selected both the peak and the trough. After selecting both points, the chart will look like this.
Now you can see how the Fibonacci Retracement levels have been calculated and loaded onto the chart. This information will help you position yourself on the market.
Imagine a situation in which you want to purchase a stock but are unable to due to a sharp rise in the stock. In such situations, it is best to wait for the stock to retrace. Fibonacci levels of 61.8%, 38.2% and 23.6% are potential levels at which stocks can correct.
The trader can plot the Fibonacci levels of retracement to identify these levels and position himself for a trade. Please note that the Fibonacci Retracement can be used as confirmation, just like any other indicator.
Only after the stock has met all of the checklist items, would I buy it. My conviction to buy a stock would be greater if it had:
If the stoploss coincides with Fibonacci level, then I am confident that the trade setup is well-aligned to all variables. I would therefore go for a strong purchase. The use of the word "strong" indicates how confident the trade setup is. More confirming factors are used to analyze the trend and reversal. The signal is stronger. This logic is also applicable to short trades.