How to Predict the Stock Market With Fibonacci
Some investors believe that certain ratios are attractive to the human mind. Because of this, humans are likely to act in a manner that reflects these ratios. Investors have turned the observation of this phenomenon into a method for making money in the stock market. One set of ratios that investors use are derived from the Fibonacci sequence.
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Instructions
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Learn the basics of the Fibonacci sequence. The Fibonacci sequence goes like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89... Each number equals the sum of the previous two.
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Note the significant ratios. The ratio of 2 numbers in sequence approaches 1.618 as the series progresses. In stock market analysis, the percentages derived from the Fibonacci sequence are 61.8%, 38.2% (100%-61.8%) and 50%.
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Create charts of a stock or index that you want to analyze using Fibonacci numbers. Look at one particular trend in the chart. For example, if a stock that is trading at $116 per share has been going up consistently since it stood at $100 per share, limit the chart to the period when the stock started moving toward $116.
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Apply the ratios to evaluate a downturn. Check if the stock is going down more or if it is going back up. If the stock falls to $111 in one day (a 31.25% loss of the $16 upward trend), watch for it to hold above $109.89, which is 38.2% loss. If the stock stabilizes around that number, which is considered a support, it probably will go up. However, if it falls below that point, it is likely to fall all the way to the next support level, which is 50% or $108.
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Practice applying Fibonacci ratios to stocks and indexes. Make predictions based upon your analysis, and then track the stocks and indexes to how accurate you are.
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Try "the fibs" in conjunction with other tools of technical analysis. Add a moving average plot to your chart or look for patterns in the stocks performance.
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Make some money. Buy or short a stock based upon the predictions you make with the Fibonacci ratios.
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Tips & Warnings
You can round off the ratios as 68% and 32%.
Fibonacci ratios closely approximate those of compound interest. Some people look at "the fibs" as a complicated way for explaining this phenomenon.
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Comments
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lets get money.
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Well if it were only that simple then we would all be trillionares...I honestly wouldn't put a ton of weight in this type of strategy, You might make a few bucks here and there but one crash and all your earnings is wiped away and then some. Further, the algorithm may predict a support point for a short period of time, but it doesn't predict how long a stock will be supported at that price. So if you buy at the support, and then the price goes down significantly (which happens ALL the time), you've just lost out by way of mere gambling. Day trading behind your computer is a losing game because the folks on wall-street find out news way before you will and will have sold prior to a crash. Similarly, they would have bought prior to a rally. Short-term trading COULD work, and applying trailing stops using a Fibonacci type algorithm could yield some gains here and there, but again, if there's a crash, you've wiped away your gains. The way to really be successful at short-term trading (different than day trading since day trading is multiple trades/day vs short-term trading which is a couple of trades/week) is to set reasonable buy-sell limits to cut your losses, or sell with a gain without getting too greedy.
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This site explains clearly the cloudy areas of the Fibonacci theory to me. I will recommend it to other reseaarch students in my class.
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I will study more closely all this theory with Fibonacci ratios, shure...
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This is great and all, thx, but how did you find the 31.25% loss? what formula did you use to find that persentage? also for the 38.2% loss? thx
