Dharmik Team: Fibonacci

Dharmik Team
www.FutureAnalyzer.com
Fibonacci
In this article we will discuss about a widespread, well-known key element of technical analysis. Why do you
think technical analysis especially some elements work so well for financial markets? Why do you think Fibonacci levels
are usually strictly followed? Because thousands and billions of traders and computer programs for trading use these
elements. This way everybody acts the same at the same time…
This is why we decided to present in the category of technical analysis, the most used and well-known methods
of predicting financial evolution. These methods are easy to understand and are very efficient.
We will discuss about Fibonacci levels. We will find out what Fibonacci levels are and how they are calculated.
We will use them in our charts and we will see how they act. We will discover how useful Fibonacci levels are and, at
the end, we will draw the conclusions. We will use Fibonacci levels daily in our analyzing and trading system.
1. What are Fibonacci levels?
The truth about Fibonacci levels is that they are useful (like all trading indicators). They do not work as a
standalone system of trading and they are certainly not the “holy grail”, but can be a very effective component of
your trading strategy.
But who is Fibonacci and how can he help you with your trading?
Leonardo Fibonacci was a great Italian mathematician who lived in the thirteenth century who first
observed certain ratios of a number series that are regarded as describing the natural proportions of things in the
universe, including price data. The ratios arise from the following number series: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144
This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third
number. Then, adding 2 + 3 to get 5, the fourth number, and so on.
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2. How are Fibonacci levels calculated?
The ratios are derived by dividing any number in the series by the next higher number, after 3 the ratio is
always 0.625. After 89, it is always 0.618. If you divide any Fibonacci number by the preceding number, after 2 the
number is always 1.6 and after 144 the number is always 1.618. These ratios are referred to as the “golden mean.”
Additional ratios were then derived to create ratio sets as follows:
Price Retracement Levels

0.236, 0.382, 0.500, 0.618, 0.764
3.
Price Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
The first set of ratios is used as price retracement levels and is used in trading as possible support and
resistance levels. The reason we have this expectation is that traders all over the world are watching these levels
and placing buy and sell orders at these levels which becomes a self-fulfilling expectation.
The second set is used as price extension levels and is used in trading as possible profit taking levels. Again,
traders all over the world are watching these levels and placing buy and sell orders to take profits at these levels
which becomes a self-fulfilling expectation.
Most good trading software packages include both Fibonacci Retracement Levels and Price Extension
Levels. In order to apply Fibonacci levels to price charts, it is necessary to identify Swing Highs and Swing Lows. A
Swing High is a short term high bar with at least two lower highs on both the left and right of the high bar. A Swing
Low is a short term low bar with at least two higher lows on both the left and right of the low bar.
Fibonacci Retracement Levels
In an uptrend, the general idea is to go long the market on a retracement to a Fibonacci support level. The
price retracement levels can be applied to the price bar chart of any market by clicking on a significant Swing Low
and dragging the cursor to the most recent potential Swing High and clicking there. This will display each of the
Retracement Levels showing both the ratio and corresponding price level. Let’s take a look at some examples of
markets in an uptrend. The same points made by these examples are equally applicable to markets in a downtrend.
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3. Chart examples for Dow and e-mini S&P 500.
1. In the first example we have an ascending trend and a Fibonacci retracement of 38%. After the price
went down 38% of the entire going up value, it returned to an uptrend. The 38% retrace is the best
moment to initiate long positions.
2. Here the image is reverse. We have a downtrend, a 38% pull back and then the price continued to go
down.
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3. The price had a 50% retrace during an ascending trend.
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4. The ascending trend had a 61% pull back.
5. The last example shows a good moment to enter long after a 50% retrace
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Dharmik Team

1. What are Fibonacci levels?

2. How are Fibonacci levels calculated?

Price Retracement Levels

Fibonacci Retracement Levels

3. Chart examples for Dow and e-mini S&P 500.

3. The price had a 50% retrace during an ascending trend.

4. The ascending trend had a 61% pull back.

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