There are likely hundreds of books floating out there about this one indicator and mostly for good reason. This indicator is very powerful, however, very few people understand it well enough to actually gain any real value from it.
Should you find yourself with the time and energy, I would strongly suggest you go all in on understanding retracements as well as the other Fibonacci indicators. They just may be the answer you seek.
All that being said, I’ll offer as simple an explanation as possible for Fibonacci Retracements and how I’ve used them.
Simply speaking, Fibonacci retracement levels are areas of support and resistance where price can or will reverse course.
Let me explain with an image. Click to Enlarge.
Take a look at the circled areas above… Pay particular attention to the fact that price either stopped at a Fib resistance level or bounced off a Fib support level. Pretty incredible right?
It is just another tool to help build the confidence in favor of one direction over another.
Key points to remember
Keep in mind this is a “Retracement”, meaning once price has extended to some level we wait for the retracement to a Fib level to make our move.
When drawing Fib levels on your charts they should be drawn in the direction of the trend. The 0% line should be at the lowest point and the 100% line should be at the highest point. Or vice versa in the case of a bearish trend. The 0% line would be at the highest price and the 100% line at the lowest.
How I use Fib Levels
I draw the line from the lowest point to the highest as mentioned above. (this works on any chart and any time frame)
I wait for price to “pull back” to the 61.8% level and pay close attention to the few days that follow. If price falls below 61% I wait until it reaches the 50% level and do the same. And so on until it gets to the 0% level. At which time I either give up on that particular stock or be prepared for the reversal.
Trust me when I tell you Fibonacci levels go well beyond this explanation and the use I’ve described here. But as you by now know, my philosophy is to use multiple indicators to determine a move and not to spend inordinate amounts of time on one indicator alone.
Have something to say? I encourage you to add it to the comments below.