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Fibonacci The Most Powerful Indicator: Technical Analysis Tools

Most Powerful Indicator Of all the trading tools I have ever used by far my favorite tool for analysis is Fibonacci studies. This is such a large and complex study that I shall not even pretend to be an expert in this area. Instead I would like to demonstrate how I apply a limited knowledge of the subject to my trading. We shall only be discussing three primary Fibonacci ratios .

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Ian Moncrieffe
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592 views5 pages

Fibonacci The Most Powerful Indicator: Technical Analysis Tools

Most Powerful Indicator Of all the trading tools I have ever used by far my favorite tool for analysis is Fibonacci studies. This is such a large and complex study that I shall not even pretend to be an expert in this area. Instead I would like to demonstrate how I apply a limited knowledge of the subject to my trading. We shall only be discussing three primary Fibonacci ratios .

Uploaded by

Ian Moncrieffe
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
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Fibonacci Page 1 of 5

Fibonacci
The Most Powerful Indicator

Of all the trading tools I have ever used by far my favorite tool for
analysis is Fibonacci studies. This is such a large and complex study
that I shall not even pretend to be an expert in this area. Instead I would
like to demonstrate how I apply a limited knowledge of the subject to
my trading.

We shall only be discussing three primary Fibonacci ratios and not


minor ratios, ovals, arcs, bands or the time axis.
First Some History
Technical Analysis Tools
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Fibonacci da Pisa
was born around
1170 the son of a
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became a
prominent
mathematician and
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newsbyewoss.ws/ForexDayTrading
we now call the
Fibonacci series.

After a trip to Egypt he published his now famous Liber Abacci (Book
of Calculation) in which amongst other things he comes up with the
sequence of numbers.
1,1,2,3,5,8,13,21,34,55,89>>On to infinity
If you add one of the numbers in the sequence to the number before it
you get the next number in the sequence e.g. 3+5=8 and so on.

After the first few numbers in the sequence if you measure the ratio of
any number to that of the next higher number you get .618 to 1 e.g. 34
divided by 55 equals 0.618. The further along the sequence you go the
closer to phi you will get.

If you measure the ratio between alternative number you get .382 e.g.
34 divided by 89 = 0.382 and that's about as far into the explanation as I
care to go. As a trader you don't need to know any of this. All you need
to know is if your charting software has Fibonacci capabilities. If it
does then that will work everything out for you.

The three Fibonacci ratios we shall use are .382, .500 and .618 and how
we can use them in our day to day trading.

http://www.tradeology.com/fibonacci.html 1/4/2009
Fibonacci Page 2 of 5

In an uptrend measure the distance between point A and point B and in


a downtrend measure the distance between point A and point B where
point A will always be the lowest recent point in an uptrend and the
highest recent point in a downtrend.

In the example below you can see a chart of the daily JPY/USD. Point
A is 119.09 and Point B is 123.16. If you calculate the 38.2%
retracement you get 121.61, the 50% retracement is 121.13 and the
61.8% retracement is 120.64.

For example. The difference between 119.06 and 123.16 is 4.07. If you
calculate 38.2% of 4.07 you get 1.55. If you then take 1.55 from 123.16
(Point B) you get the 38.2% retracement of 121.61. You can use the
same principal for the other retracement levels.

In our next example of the 1-minute Dow Jones Point A is 7.916.08 and
point B is 7.877.70. If you calculate the 38.2% retracement you get
7892.36, the 50% retracement is 7896.89 and the 61.8% retracement is
7901.42. For example. The difference between 7.916.08 and 7877.70 is
38.38, if you calculate 61.8% of that you get 23.72. If you then take
23.72 and add it to Point B of 7.877.70 you get 7901.42 the 61.8%
retracement. The only difference between the downtrend and the

http://www.tradeology.com/fibonacci.html 1/4/2009
Fibonacci Page 3 of 5

uptrend is that you add your calculations to Point B and in the uptrend
you subtract from Point B.

So how can we use


all this
information? Well,
you would be
amazed just how
many times a
security will find
support or
resistance at
Fibonacci levels. I
think a large part of
this may be that so
many traders use
this technique in
their analysis that it
is a self-fulfilling
prophesy and part
because it falls into
the natural order of
the market.

I apply this
technique by first
identifying a trend
in the market I am
following. As soon
as I can see that
there is going to be
a retracement I
them calculate my
retracement levels.

http://www.tradeology.com/fibonacci.html 1/4/2009
Fibonacci Page 4 of 5

I then enter at the


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level and place my California trader makes $18 Billion in a single year! Find out How
stop loss behind www.VirtualinvestingClub.com

the 61.8%
retracement level.
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If I feel the News on Forex Day Trading topics. Check us out!
difference between newsbyewoss.ws/ForexDayTrading

the 38.2% and


61.8% level is to
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great a risk I drop
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technique but get a


much tighter stop.

In our next lesson I shall show you how to work out targets with
Fibonacci, you will then have a logical place to enter the market, a
logical place to put your stop and a logical target.

Good Trading

Mark McRae

Fibonacci

http://www.tradeology.com/fibonacci.html 1/4/2009
Fibonacci Page 5 of 5

Information, charts or examples contained in this lesson are for illustration and
educational purposes only. It should not be considered as advice or a recommendation
to buy or sell any security or financial instrument. We do not and cannot offer
investment advice. For further information please read our disclaimer.

http://www.tradeology.com/fibonacci.html 1/4/2009

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