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Saturday, March 17, 2018
Article written by Dave Wooding

Fibonacci Retracement Basics For Stock Traders

If you are a stock trader interested in improving your ability to pick possible turning points in the stock market, consider using Fibonacci retracements when identifying trading opportunities.

Using Fibonacci in your trading does not need to be complicated. Identifying obvious highs and lows on a stock chart is what you need to focus on.

Start by looking at a daily chart of your favorite stock. One of the fastest ways to determine turning points using Fibonacci is to start with the shortest amount of time that you can easily identify one significant high and one significant low. Make certain to start with the current date and work back in time.

Once the high and low is identified, use a Fibonacci calculator to determine the 38%, 50% and 62% retracement levels. Make note of these price levels, you will need them for comparison.

A Fibonacci calculator takes the difference between the high and low prices and multiples the result by either 0.38, 0.5, or 0.62. The new number is added to the low (or subtracted from the high) to get the appropriate Fibonacci retracement level.

Now look for the next significant high or low, one or the other, not both. Now you should have either a significant high and two significant lows or two significant highs and one significant low.

An example will make this clear. Let's assume you are looking for a buying opportunity. Starting on the far right hand side of the stock chart, find the most recent significant high. Next, find the first significant low. Finally, you want to look for another low that occurred before the first low you identified and is lower in price.

For the next significant high and low, determine the retracement levels.

Here's where the magic of Fibonacci retracements comes in. Compare the first set of retracement numbers to the second set of retracement numbers and look for retracement levels that overlap. That's where your best trading opportunities typically are.

For instance if the 38%, 50%, and 62% retracement levels for the shorter time frame are at $54, $51 and $48, respectively, and the retracement levels for the longer time frame are at $55, $49, and $43, then the price to focus on is in the $48 to $49 range.

Why is that? You have traders from the shorter time frame using Fibonacci identifying trading opportunities along with traders from the longer time frame identifying trade setups that coincide with each other. Your job is to find out where the most likely opportunity of a reversal is. Fibonacci analysis helps you identify the most likely turning points.
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