Adam & Eve Tops
Anticipating  A Selloff
Andrews Pitch Fork
Bilateral Trade Setups
Bollinger Bands
Breakout Trading
Comp. Relative Strength
Cup With Handle
Cutting Loses
Daily Range
Exit Strategies
Exploring Market Physics
Dow and Elliot Waves
False Breakouts and Whipsaws
Flags and Pennants
5 Fibonacci Tricks
Finding Stocks
Fun With Fibonacci
Greed and Fear
Low Down On Bottoms
Market Timing
Head and Shoulders
Hell's Triangle
Momentum Cycles
Momentum Trading
Morning Gap Strategies
Moving Average Crossovers
Pattern Failure
Pitfalls Of Selling Short
Playing Failed Patterns
Point and Figure
Pull Back Day Trading
Selling Declines
Scanning Tips
Stage Analysis
Surviving Bear Markets
The Big W
Tale Of The Tape
Tape Reading
Time Trading
The Gap Primer
Trailing Stops
Trading Execution Zone
Triangle Trading
Trend Waves
Trend Direction and Timing
The Profitable Trader
Uncharted Territory
Williams %R
Wedges and Volume
20 Golden Rules
20 Rules For Trade Execution
20 Rules To Stop Losing Money
5 Wave Decline
3-D Trade Execution
Voodoo Trading




Fun With Fibonacci


12th century monk Leonardo de Pisa, better known to his friends as Fibonacci, discovered a fascinating mathematics sequence that appears throughout nature. Beginning with a simple 1 + 1, the sum of the last two number sets that precede it creates another Fibonacci value:

1+1=2 1+2=3 2+3=5 3+5=8 5+8=13 8+13=21 13+21=34 21+34=55 etc, etc.
For reasons that remain unknown, major ratios drawn from these numbers describe a predictable interaction between trend and countertrend movement in markets. The most important ones to remember are 38%, 50% and 62%. Applying these percentages to trending price predicts the extent of retracement contrary to the underlying trend, as well as how far a new high or low will travel. For traders, these hidden points represent invisible support/resistance zones where prices will hesitate and/or reverse.
Fibonacci numbers closely relate to Elliott Wave theory. However, using them requires only a short primer in that arcane study. At the minimum, develop the basic understanding that primary trends travel in 5 waves (3 forward and 2 backward) while countertrends move in 3 waves (2 forward and 1 backward). That's all you need to easily manipulate Fibonacci price grids.

Grab some charts and a good charting program. All good technical analysis software has this Fibonacci function. For example, both SuperCharts and Real Tick allow custom entry of all major points. Lay Fib lines over the extremes of dynamic trends using the Fibonacci Grid. Or just take a calculator and measure swing action from intraday, daily or weekly quote listings.

Placed correctly, you'll notice that most markets swing off Fibonacci ratios as they move from support to resistance and back. Once you get the knack of it, you'll see that trends in all time frames have common elements and similar proportionality.

Trade decisions using Fibonacci retracement must include entry/exit analysis (risk:reward) with respect to key pivot points. Focus on getting into a market at major ratios while standing aside as price hovers between key zones. Most times, the smartest execution will be counter the most immediate short-term trend.

Hidden Support and Resistance: Fibonacci defines trend movement over broad time frames as well as very short ones. On this weekly chart of CPQ, note how the 38%, 50% and 62% retracement of the strong 1997 rally have defined the broad base under construction for almost two years.
Retracement science works in bear markets as well as bull markets. Major market plunges frequently recover 50% or 62% of the last selloff before continuing the decline.