Technical Analysis 101 - Fibonacci Tools

The Fibonacci Pattern is a sequence of numbers that leads to ratios that are found all over the world. 0,1,1,2,3,5,8,13,21... as you can see each number in the pattern is the sum of the previous two numbers. The relationship between these numbers form ratios 0.236, 0.382, 0.5, 0.618 and 0.764. Usually the emphasis is put on the middle three ratios and it should be noted that 0.5 is not a true Fibonacci ratio but is included because the price does almost always respond to this level. Why does the price respond to these levels? No, one actually knows, keep in mind this is where the prices tend to find resistance but there is no guarantee.

If the price action is a downward movement you are going to want to use Fibonacci retracement. Start by choosing Fibonacci retracement tool, third menu down on the left, look for a large price movement. start by clicking on the high point of the movement, then drag to the low point and then out to the right. As you can see in the image above the support and resistance lines line up pretty closely without any adjustment. These are place where the price did find support or resistance and we could reasonably believe it could again. As with most of the other tools on higher time frames you will tend to get better results. it is not uncommon for traders to use different highs or lows to place Fibonacci inside Fibonacci to gain better resolution and insight.

What if the price movement is up instead of down? Choose the Fibonacci Extension tool from the same menu where you found Fibonacci retracement tool. Starting at your low point click and drag up to your high point, then back down to you low point as shown in the image above. This will give you Fibonacci retracement on the bottom and extension on the top.