How to use the Fibonacci Retracement for stock trading
Fibonacci retracements are a technique used in technical analysis. While there are many uses for it, the most popular seems to be as a support and resistance tool.
We will not explain why these levels occur; we are simply providing instructions on how people can use them to make money with stocks (or futures).
Fibonacci Retracements Explained
The overall idea is that if the stock price reaches one of these ‘support’ levels, investors who bought the stock will be less willing to sell.
As a result, they will hold off selling until the stock price returns to certain key levels again.
On the other hand, if the price falls to one of these ‘resistance’ levels, people who sold their stocks at that level (when it was high) will start wanting to buy again to get their profits back. This demand pushes prices back up, sometimes even higher than when the resistance level was first reached.
Fibonacci retracement levels are different for every asset; however, some standard ones are 38.2%, 50%, 61.8% and 76%. These values are found by taking two points on a chart (usually essential lows in the stock) and dividing the two points by one of the below-listed ratios.
For example, if we had a stock that increased from $5 to $10 then back down to $5 again:
$10-($5-$5)/2 = 38.2%
Wells Fargo (WFC) is an example of a company often mentioned in trading circles when talking about Fibonacci retracement levels.
It seems like most stocks will either approach the support/resistance price, bounce off of it and return to the average level, OR they will completely make new lows/highs after touching the resistance/support prices (or even going beyond).
We don’t think there is any way to predict which will happen.
However, if someone were to take a stock that was at $1 and had an upward trend (like WFC), it would make sense to put buy orders in near these levels if one felt like the trend would continue (over time).
The price of the stock continued to increase.
Another company that often has these Fibonacci levels drawn on it is Apple, Inc. (AAPL). A great example occurs at $222 – $217, which was a major support/resistance level for this stock over time.
Price action followed by actual price movement with WFC and AAPL shows how Fibonacci retracement levels can be used as both short term resistance/support levels AND long term support/resistance levels.
They are also very good areas for placing buy or sell orders (if someone feels like taking positions in stocks they own).
Fibonacci Retracement Levels may not always work; however, given enough time, I think they will usually produce some sort of result, whether the stock will bounce off of them or make new lows.
When you trade in the stock market, there are certain things that you need to know. One of these is the Fibonacci Retracement Tool.
This tool can help you learn more about the stock market and how to trade it effectively.
If you are one of those, who want to be successful when trading stocks, then learning about this amazing tool should be done.
The Fibo retracement tool was created by a man named Ralph Nelson Elliott, who has become known for his technical analysis theories on markets. He did not create the tool to predict stock price movements, but rather he discovered that the tool was a good representation of market activity.
Take note that not all traders who use this Fibonacci retracement tool are successful in their trade. Some lose money while others earn a lot of cash from it.
This is because they do not have reliable strategies when trading with the Fibo tool at hand. One needs to follow a proven strategy for trading stocks using the retracement tool to be really successful.
One can see how Fibonacci Retracement levels (over time) will turn into both short term resistance/support levels AND long term support/resistance levels.
They are also very good areas for placing buy or sell orders (if someone feels like taking positions in stocks they own)
The Fibonacci retracement level is a term used in forex and stock trading to identify support and resistance levels beyond simple trend lines or linear measurements.
Based on the work of mathematician Leonardo Fibonacci, analysts apply this technique by finding two significant points on a chart and dividing the vertical distance between them by precise ratios such as 38.2%, 50%, 61.8% and 100% (and sometimes also 23.6%).
The resulting levels are often referred to as”retracement levels” or “key reversal levels”, although this is a misnomer since they are support/resistance price zones.