As of 10/25/2021
  Indus: 35,741 +64.13 +0.2%  
  Trans: 15,874 +102.32 +0.6%  
  Utils: 918 -3.65 -0.4%  
  Nasdaq: 15,227 +136.51 +0.9%  
  S&P 500: 4,566 +21.58 +0.5%  
YTD
 +16.8%  
 +26.9%  
 +6.1%  
 +18.1%  
 +21.6%  
  Targets    Overview: 10/14/2021  
  Up arrow36,000 or 34,600 by 11/01/2021
  Up arrow16,100 or 14,500 by 11/01/2021
  Up arrow925 or 860 by 11/01/2021
  Up arrow15,400 or 14,200 by 11/01/2021
  Up arrow4,600 or 4,250 by 11/01/2021
CPI (updated daily): Arrows on 10/8/21
As of 10/25/2021
  Indus: 35,741 +64.13 +0.2%  
  Trans: 15,874 +102.32 +0.6%  
  Utils: 918 -3.65 -0.4%  
  Nasdaq: 15,227 +136.51 +0.9%  
  S&P 500: 4,566 +21.58 +0.5%  
YTD
 +16.8%  
 +26.9%  
 +6.1%  
 +18.1%  
 +21.6%  
  Targets    Overview: 10/14/2021  
  Up arrow36,000 or 34,600 by 11/01/2021
  Up arrow16,100 or 14,500 by 11/01/2021
  Up arrow925 or 860 by 11/01/2021
  Up arrow15,400 or 14,200 by 11/01/2021
  Up arrow4,600 or 4,250 by 11/01/2021
CPI (updated daily): Arrows on 10/8/21

Bulkowski's Fibonacci Tutorial

 

My book, Trading BasicsTrading Basics: Evolution of a Trader book., discusses both Fibonacci retracements (as a stop location, starting on page 50) and extensions (starting on page 84).

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Many traders use Fibonacci ratios in their trading. I have found that they work for me and perhaps they can help improve your trading, too. Let's take a closer look.

Fibonacci Turning Points

Waves in Flir Systems (FLIR) on the daily scale.

I show a chart of Flir Systems (FLIR) on the daily scale.

Points A, B, and D are major turning points. Point C is a minor reversal.

When looking for Fibonacci retraces or extensions, you will want to select turning points that are of the same magnitude. By that I mean look for large, major turning points of similar size, or focus on four smaller turning points, also of the same size.

You should probably avoid mixing small and large turning points because that may give you unreliable results (but you can try it). Many software packages will draw the Fibonacci lines on your chart for you.

Point D retraces almost 62% of the AB move. The next section explains how I used the chart to compute the retrace.

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Fibonacci Retracements

An ABCD wave to illustrate Fibonacci ratios.

The figure shows an ABCD wave. Think of each turning point as a peak or valley on the price chart, just like in the previous chart.

Assume that point A is at 10 and B is at 15. There are three main retrace values that I like to use: 38%, 50% and 62%. How we derive those values and others is not important, nor is the Fibonacci sequence.

If we take the price difference from A to B (15 - 10 = 5) and multiply it by the three Fib values, we get 5 x 38% = 1.90, 5 x 50% = 2.50, and 5 x 62% = 3.10. When you add those values to A or subtract them from B, you get three possible turning points: 13.10, 12.50, and 11.90.

The stock could turn at any of those three values as well as at other values.

If I want to buy the stock represented by the chart, I will wait for a 62% retrace and then pounce. That means placing a buy order at 11.90 in this example, or about where point C forms. Other Fibonacci retracement values are 79% and 86%.

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Fibonacci Time Extensions

To help predict when point C will arrive, you can apply the same math to the time scale. I show that with points E, F, and G. If the time between E and F is 30 calendar days then multiply it by 38% to get G: 30 x 38% = 11 calendar days. Add 11 days to F to predict turning point G. Point H might be a 162% extension of the EF move.

You can use trading days or price bars, if you wish, and maybe other extension values might work better, such as 18%, 27%, 62% and 162%. Since I don't use Fib extensions on the time scale, you will have to figure out what works best for your application.

Fibonacci Price Extensions

Let's say that you bought the stock at C. At what price will D arrive?

Since this is not a retracement but an extension of the AB move, we can apply one of the extension values. I could use 1.18 (118%), 1.27 (127%), 1.618 (162%) or 2.618 (262%). The 38% extension (1.38) is one I like. We will use that in this example.

The AB move is 5 points (10 to 15), so 38% of that is 1.90 which I add to the price of B (15) to get D (16.90). Thus, if I bought the stock at C, I would consider selling if the stock approached 17. It would not be an automatic sale, but I would search the area for overhead resistance that might cause price to stall.

The same math applies to downward price trends. Figure out the length of the first wave (use BC in this example) and calculate the retrace or extension of that move. Add the retrace value to C (for a higher target) or subtract the extension value from C to get a lower target.

-- Thomas Bulkowski

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Other Fibonacci Examples

See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.
Legal notices: "As an Amazon Associate I earn from qualifying purchases." Paid links).

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Encyclopedia of Candlestick Charts Trading Classic Chart Patterns

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