Fibonacci Trading PDF

Fibonacci Trading
Author: Dr. D. Selzer-McKenzie

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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:
3
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
4
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.
5
Example 1
Example 1.1
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.
Example 2
Example 2.1
Example 3: Here's another example. If the market retraces from the

Swing High, where will it find support?
Example 3
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
Example 4: Here's one more example.
Example 4
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 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.
.
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.
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
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
.
Example 7: Here's another example. Will the market continue higher

to one of the Fibonacci Price Extension Levels?
Example 7
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
Example 8: Here's one more example.
Example 8.1
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
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 self-
fulfilling 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.
34/21 = 1.61904 ~ 1.619

21/34 = 0.61764 ~ 0.618
21/55 = 0.38181 ~ 0.382 55/21 = 2.61904 ~ 2.619
21/89 = 0.23595 ~ 0.236 89/21 = 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% 100%
38.2% 138.2%
50% 161.8%
61.8% 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

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Fibonacci Trading

Author: Dr. D. Selzer-McKenzie

The Truth About Fibonacci Trading

The Truth About Fibonacci Trading

Leonardo Fibonacci was a great Italian mathematician who lived in the

Price Retracement Levels

Price Extension Levels

Most good trading software packages include both Fibonacci

Fibonacci Retracement Levels

In an uptrend, the general idea is to go long the market on a

Example 1: Here we plotted the Fibonacci Retracement Levels by

Example 2: Again, the Fibonacci Retracement Levels were plotted on

Example 3: Here's another example. If the market retraces from the

Example 4: Here's one more example.

the last Swing Low. Thirdly, placement of stops is a challenge - it is

Fibonacci Price Extension Levels

In an uptrend, the general idea is to take profits on a long trade at a

Example 5: Here we plotted the Fibonacci Price Extension Levels by

Example 7: Here's another example. Will the market continue higher

Example 8: Here's one more example.

Fibonacci Retracements and Extensions,

Dividing a Fibonacci number by its immediate predecessor yields an approximation

The sequence is named for medieval mathematician Leonardo

In finance, Fibonacci numbers, or more precisely the Golden

After a large price movement, technical traders pay particular

Fibonacci Extensions are, appropriately enough, an extension of

However, it would be a mistake to dismiss Fibonacci methods

The key is to develop an understanding of how other traders

Who was Fibonacci?

While most attribute the Fibonacci Sequence to Leonardo, he

Suppose a newly-born pair of rabbits, one male, one female, are

How many pairs will there be in one year?

This mathematical progression is now recognized as the

The sequence of numbers looks like this: 0, 1, 1, 2, 3, 5, 8, 13,

This sequence has repeatedly appeared in popular culture from

While some are not exact, if you repeat this mathematical

34/21 = 1.61904 ~ 1.619

21/89 = 0.23595 ~ 0.236 89/21 = 4.23809 ~ 4.238

he dimensional properties adhering to the 1.618 ratio occur

This number, when added to 0.618, equals 1.

With the proliferation of real-time charting and data, software

Fibonacci as a Technical Analysis Tool

Price Retracements A strategy for quality entry points

Price Extensions An approach to determining how far

Then after we have covered the basics we will talk about

If prices have fallen from a recent swing high down to a swing

It is important to note, the larger price move from swing high

While there are many variations of the ratio set, simple is

23.6% -- The shallowest of the retracements. In very

38.2% --- This is the first line of defense of the current

61.8% -- retracing to this typically signals a breakdown in

100% -- matching the move

n this section we will also show examples of how potential

Notice in each case we have simply added 100% to the

So lets take a look at some examples of Fibonacci

Ok, we have shown some examples of well behaved price

The example below shows the GBPUSD making a bottom and

This example shows yet another way to use Fibonacci

Retracements are the cornerstone of Fibonacci theory as it

In our first example we entered a long position on the 23.6%

Fibonacci Extensions take into account three price points. A

Like Fibonacci Retracements, I use exactly the same set of

I find Fibonacci Extensions the most useful as a money