How to Invest Using Fibonacci Techniques

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How to Invest Using Fibonacci Techniques. Personal financial investments are important for building long-term wealth, but it can be so confusing to analyze the market and make good decisions. The Fibonacci sequence and Fibonacci ratio occur often in nature. The stock markets, run by humans, are also affected by it. Using Fibonacci information can help traders have discipline in their investment strategies, which is key in obtaining large, long-term gains when trading on the markets.

Things You'll Need

  • Shares in stock
  • The stock's performance (graph or ticker)

Understand what the Fibonacci sequence and the Fibonacci ratio are. The Fibonacci sequence is simply adding each number to the previous one. For example: 1, 1, 2, 3, 5, 8, 13, 21, 34. The Fibonacci ratio is 0.618 or its inverse, 1.618. This ratio is also called phi, the golden mean, the golden ratio or the divine proportion. Phi is derived by dividing a number of the sequence by its successor or predecessor.

Understand the percentages and the way the golden ratio works in investments. As a percentage, 0.618 becomes 61.8 percent and its inverse 38.2 percent (so they are equidistant from 100 percent and 0 percent, respectively).

Draw five horizontal lines on a stock's trading chart, with 0 percent being at the lowest point, and 100 percent at the highest point. Draw in lines at 38.2 percent, 50 percent and 61.8 percent. These lines are used to do retracements on a stock's history, and can indicate the old and new support and resistance levels.

Find the high and the low on the chart again, and then draw arcs that pass through these three points: 32.8 percent, 50 percent and 61.8 percent. These arcs anticipate the stock's support levels, resistance levels and ranging.

Create Fibonacci fan lines. Draw a line from a low point (left) to a high point (right). Draw a vertical, perpendicular line that goes from the high point straight down until it is at the same level as the low point. Mark the Fibonacci points of 32.8 percent, 50 percent and 61.8 percent with a dot. Draw straight lines from the left low point through each of the dots. These fan lines also show levels of support and resistance of trading on the market.

Draw Fibonacci time zones on a stock ticker or graph. Draw the first vertical line through an extreme point. Continue drawing vertical lines on days of increasing intervals, using the Fibonacci sequence numbers (1, 1, 2, 3, 5, 8, 13) to know where to draw the vertical lines. There will be significant price change of the stock at or very close by these Fibonacci time zones.

Analyze the retracement lines, arcs, fan lines and times zones that you drew in Steps 3 through 6.

Decide in advance where your entry and exit points will be for trading the stock.

Stick with your decisions, even if the market gets rough, since this is about large gains over the long-term.

Enjoy your profits.

Tips & Warnings

  • Don't let emotions change your decisions. Stick to the mathematics and be disciplined about when you are trading. Buy and sell according to the support and resistance indicators in your Fibonacci analysis.

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