More On Fibonacci (Continued From Post #122):
Now that we have covered some of the esoteric but interesting aspects of the Fibonacci summation series, let's take a look at how Fibonacci ratios can help improve your trading.
The most commonly used Fibonacci ratios are -1.618,
-1.382, .382, .50, .618, 1.382, and 1.618. Some traders also use the square root of 1.618 (1.272 and its reciprocal .786) since some stocks trade more closely to these ratios.
As I am sure you are aware, during the course of the trading day every stock and/or index trades in a rhythmic, wave-like pattern exhibiting a series of peaks and troughs. By utilizing Fibonacci ratios, we can determine with impressive accuracy key support and resistance levels in relation to these peaks and troughs for any stock or index.
As a rule of thumb, following a peak(trough) in a security, that security will pullback (bounce) in accordance with the Fibonacci ratios mentioned above. Typically, low beta stocks will retrace .382 to .50 of the entire wave movement (from trough to peak in an uptrend or vice versa in a down trend)just formed and high beta stocks will retrace .50 to .618 of the same movement.
The importance of using Fibonacci ratios is obvious. When a stock peaks or bottoms, we are able to project with reasonable accuracy the amount of the pullback (bounce) for re-entry into the trade. Similarly, we can use Fib ratios to project support and resistance levels for the security we are trading(more on this in another post).
So, the next time the stock you are trading runs/falls $1.00 from trough (peak) to peak (trough), look to see how far it pulls back (bounces). Don't be surprised when you find the amount to be $0.38, $0.50 or $0.62...just thank Fibonacci!
Trade Well
Ed - DrFibo |
