Fibonacci Retracement Levels
Using Retracement Levels in Your Trading
Leonardo Fibonacci da Pisa was a thirteenth century mathematician who (re)
discovered what is today known as the Fibonacci sequence. Adding 1+1 and then
continuing to add the sum to the previous number will arrive at this
numerical sequence. The sequence gives rise to the following numbers: 1, 1,
2, 3, 5, 8, 13, 21, 34, 55 and so on.
Ratios of these numbers
to each other give us important values: 62%, 50% and 38%. The prevalence of
these ratios can be found all around us - from the double helix of DNA to
spiral galaxies! The pioneering work of traders like W.D. Gann and R.N
Elliott also showed that these ratios are prevalent in the financial markets.
While there are many uses for these ratios in technical analysis, we are
going to concentrate today on Fibonacci Retracement Levels.
Many technicians have
noted that markets tend to reverse or consolidate once they reach one of
these ratio levels (measured from the distance of the previous trends
reversal). They can used as entry levels, exit levels and even as a money
management tool (as in OmniTrader's Eighth Tool).
To identify Fibonacci
Retracement Levels, you must first identify the latest peak and valley in the
securities chart. Once this is done, you can measure 3/8ths, 4/8ths and
5/8ths of the distance from valley to peak (or vice versa if you are looking
at a short position). In OmniTrader, there two tools that help you do this.
The Fibonacci Retracement Tool will try and identify the latest peaks and
valleys and then show you where these important levels are located. The
Eight's Tool in OmniTrader allows you to draw across the latest peaks and
valleys yourself and then see how that trend divides into eighths.
Fibonacci Retracement
Levels are one of the most powerful (and underused) tools available to
traders. These measurements are of great use with any market that is
reasonably liquid.
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Broadcom shows a
nice example of a reversal at 62% of the previous trend
Another 62% reversal
example for AMKR
SAP shows a nice
turn at the 50% retracement level
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