How to Chart With Fibonacci

Fibonacci is a widely used tool in technical analysis.

Fibonacci is a charting tool that relies on prices making predictable, repeating patterns. It is based on the Fibonacci ratio, which is approximately 1 to 1.618 (or 0.618 to 1). The tool identifies price levels at 38.2%, 50% and 61.8% of a given price range. These levels aid in identifying future price movements.

Things You'll Need

• Charting software
• Fibonacci tool

Instructions

1. Pull up a price chart. The specific chart type doesn't matter as Fibonacci works equally well with stocks, bonds, futures and Forex. The chart can be in any time frame.

2. Identify a price trend within the chart. When prices make higher highs and lows, this is called an uptrend or rally. When prices make lower highs and lows, this is called a downtrend. Each trend you identify must have a high point and a low point.

3. Create Fibonacci retracement levels with the Fibonacci tool. Select the high and low points of the price trend as the end points of the Fibonacci range and the tool will automatically plot the retracement levels.

4. Anticipate future price reversals at the retracement levels. In the case of an uptrend, this would constitute prices dropping to one of the levels and then rallying again. For a downtrend, this would mean that prices rise somewhat and then fall after hitting the retracement level. There is no guarantee that prices will react at a particular Fibonacci level, but Fibonacci charting is thought to increase the probability of successfully predicting price reversals.

References

• The Swing Trading Guide: Fibonacci Retracements