How to Calculate a Fibonacci Retracement

The fibonacci retracement is an important price movement in technical analysis. It is named after the Italian mathematician Fibonacci, whose number series approximates the golden ratio. Technical analysts apply this ratio to price charts in order to find possible levels of support and resistance.

You too can use the fibonacci retracement to increase your trading success. It doesn’t involve any complex calculations, as you simply plot the retracement levels on top of your price chart. In fact, the technique has become so popular that most charting software packages include a fibonacci tool for you to use. All you need to do is point and click and you’re set.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Charting software
• Fibonacci tool

1. Choose a price range. Identify a rally or decline and use it as the basis for your fibonacci retracement calculations. The price chart you use can be in any time frame. In fact, you can calculate fibonacci levels in multiple time frames and try to find price levels that match up. These price levels are considered to be notably strong areas of support or resistance.

2. Calculate the relevant retracement levels. For a given price range, calculate retracement levels of 38.2%, 50% and 61.8%. Why are these percentages used? You may recall that if the value of a line is 1, you must divide the line into lengths of approximately .618 and .382, or 61.8% and 38.2%, to create the golden ratio. The 50% level is used because the halfway point of a range is seen as a significant area of support and resistance.

3. Get rid of unnecessary retracement levles. If you use a fibonacci tool, it will calculate retracement levels automatically when you specify a price range. However, sometimes the tool will calculate price levels that you don’t need. If this is the case, get rid of all levels except for 38.2%, 50% and 61.8%.

4. Alter the end points of your range if necessary. Often, people use the extreme high and low of a range to calculate fibonacci retracements. However, these are not always the best points to use. For example, you may obtain more accurate projections by using prices just inside of the extreme high and low. The best way to check your calculations is to define a range and then see if past prices reacted to the fibonacci retracement levels you come up with.

5. Use the fibonacci levels to anticipate future areas of support and resistance. Note that these levels are interchangeable. For example, a rising price may react to a resistance level several times before breaking through. At this point, the former resistance level becomes a level of support and the price may very well rebound off this level in the future.

Tips & Warnings

• Calculating fibonacci retracements is part art and part science. The more you practice, the better you'll get.

Resources

• Fibonacci Analysis by Constance Brown
• Investopedia: Fibonacci Retracement

[jaredbangerter]

on 10/18/2009 Sounds pretty complicated! Good to have a tutorial for calculating this on hand though. 5* and rec