Article by Neal
Hughes
First, a few words about Fibonacci himself…
Leonardo Pisano (nickname Fibonacci) was a mathematician,
born in 1170, in Pisa (now Italy). His father was Guilielmo,
of the Bonacci family. His father was a diplomat, as a result
Fibonacci was educated in North Africa, where he learned "accounting" and "mathematics".
Fibonacci also contributed to the science
of numbers, and introduced the "Fibonacci sequence"
The Fibonacci sequence is the sequence 1,
1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, introduced in his
work "Liber abaci" in a problem involving the
growth of a population of rabbits.
Aside from this sequence of number where every
next number is the sum of the proceeding two, 0, 1 (0+1),
2 (1+1), 3 (2+1), 5 (3+2), 8 (5+3), 13 (8+5), etc.
There are the "Fibonacci ratios"..
By comparing the relationship between each number, and each
alternate number, and even each number to the one four places
to the right, we arrive at some fairly consistent ratios..
The important ones are .236, 50, .382, .618, .764, 1.382,
1.618, 2.618, 4.236, and for good measure we include 1.00
..
It turns out that the ratios are mathematical
principles prevalent in nature around us, and is also in
manmade objects. There are many interesting, entertaining,
and poetic observations about Fibonacci numbers and ratios
in the universe (see the reference section below). Fibonacci
numbers appear in ancient buildings, in plants, planets,
molecules, the dimensions of human bodies, and of course
snails… But of what use is all that to the lowly trader?
What really interests you, the application
of Fibonacci techniques in the trading environment..
Traders usually study charts! Fibonacci ratios
may be applied to the Price scale, and also to the time
scale of charts. I study the price scale. My focus here
will be on the price scale for now, perhaps in the future
I'll add some timescale studies.
Prices never move in a straight line. Look
at any chart, you will see many wiggles, as price advances
and retraces.. Stocks, Futures, Forex, all instruments which
are liquid, will often retrace in Fibonacci proportions,
and advance in Fibonacci proportions. Not always, and not
precisely to the penny. But very often, and reasonably close!
This happens often enough that profitable trades can result.
I will show you some examples below.
I used Fibonacci ratios with a few simple
indicators to help determine probable price turning points,
optimum entry, exit and stoploss levels. My complete techniques
are available in online video seminars, inperson seminars,
and via my realtime online chat facility. For more details,
see the following web page: http://www.surefiretrading.com/fibmaster.html
The application of Fibonacci to trading can
be very complex, and take much time and experience to perfect.
Many traders enjoy making the process as difficult and as
complex as they can tolerate.. I do the opposite, I try
to simplify, try to bring clarity.
Fibonacci example  Microsoft Weekly chart.
This lesson demonstrates a very basic way to use Fibonacci
levels. You just read about Fibonacci ratios. We will use
just one of those ratios for now, the .382 Fibonacci ratio.
In this chart MSFT made a high of (approximately) $59.97
in December of 1999. After that, it moved down to make a
low of $30.19 in May of 2000.
The down move was $29.78 (59.9730.19), quite
a substantial amount.
Projecting from that low in May, and using
a Fibonacci ratio, we can calculate 29.78*.382=$11.37 .
So 38.2% of 29.78 is 11.37 . If MSFT were to rally 38.2%
of the downmove it would reach $41.57 (11.37+30.20). I'm
using rounded numbers in my calculations, the chart above
calculates it to be $41.564, we don't need that degree of
accuracy!
Several weeks later, MSFT rallied and resisted
right near that .382 Fibonacci level !!
So we were able to predict a future probable
turning point (after the low of May 2000), using the Fibonacci
ratio of .382!! If only it were always so easy.
The steps involved are:
 Calculate the total value of a significant pricemove
(high to low, or viceversa).
 Calculate a Fibonacci retracement (in this case .382)
of the prior move.
 Look for price to confirm, by resisting (or support
in an upmove) near that predicted retracement area.
Fibonacci example  Microsoft Daily chart.
This chart shows how a different Fibonacci level (61.8%)
predicted resistance and a market turn.
Notice how the market behaved at the .382
level (30.80 area). Initially the market spiked through,
then fell back to that level (late October). We cannot expect
a chart to retrace at every Fib level. We can expect some
support/resistance as buyers/sellers enter the market at
these levels, but we can't always predict whether the market
will actually turn at any particular level. Fibonacci techniques
are used to alert you to a possible trade, if that price
level does cause support or resistance. These techniques
are not used as a trigger for entry. Other indicators are
used in conjunction with Fibonacci studies to provide higherprobability
entries..
As mentioned before, there are several Fib levels,
.236, 50, .382, .618, .764, 1.382, 1.618, 2.618, 4.236,
and 1.00 .. So there are several places to look for a market
turn. They can be calculated in advance, but trading blindly
at a fib level can be dangerous, because you never know
for certain (in advance) whether the market will turn at
any particular Fib level. I use other indicators to help
overcome that problem, click
here to learn how to determine which Fib ratio is likely
to be strong enough to turn the market.
Important notes from this lesson:
 There are several Fib levels.
 It takes some skill to determine which Fib level
is likely to cause the market to turn.
 There are some techniques to help you determine where
a market is more likely to turn.
 Do not blindly anticipate a market turn at a Fib
level.
More Fibonacci examples.
QQQ Weekly chart with a deep retracement to
.618 and a weak attempt to rally after that. However, consider
the daily chart and intraday traders. they would have enjoyed
the rally from $75 to $100, after going long from a support
level that could have been predicted in March!
QQQ daily chart. Multiple Fib levels timing
the market perfectly in 3 consecutive waves up!
Intraday chart, QQQ 30minute. Notice the two
market Fib retracements (there are others in this chart too)..
The rally from 29.26 stopped at 31.10, then it supported **twice**
at 30.39, for two good scalps. The next highlighted Fib support
is at a retracement of .618 from the move up 30.47 to 32.49
.. Both of these support levels were predictable before the
market supported there.. Hint: See how the rally continued
after the shallow retracement to 30.39 ... See how the rally
after the deeper retracement to .618 near 31.25 was a weaker
rally.. This is common, a deeper retracement often foretells
a weaker rally... See the next lesson in the table of contents
for more on these advanced Fibonacci trading principles.
Another intraday chart, S&P 5minute.. The
first Fib retracement is on a bearish move, an opportunity
to short. The second is bullish, with a long entry near 999.25
.. Note that popular charting software will calculate Fibonacci
to rediculous precision, we don't need anything closer than
one tick! Actually, you should allow some room don't expect
precision every time. Allow the trade some room to develop,
or you will be stopped out too often.
More Advanced  Microsoft Daily chart.
By now you're probably quite interested, perhaps applying
all those Fibonacci ratios to many charts.. You should experiment
with your own charts. As long as the instrument traded has
a lot of liquidity (not a penny stock for example), you should
start to see Fib support and resistance at work. You will
start to notice that Fibonacci levels "work" sometimes
and not others. Sometimes the trades are not profitable, or
are less profitable than others. You need to develop the skills
required to select better trades.
In this minilesson I want to show you how to evaluate price
action based on which Fib levels it responds to, and how the
market behaves immediately preceding the Fib support/resistance.
The chart below actually has many Fibonacci
levels "performing well", providing support or
resistance to the market. I want you to focus on the two
that I have identified, for the purposes of this lesson.
The first upmove that I have identified topped
out at $26.90, and then retraced 61.8% before supporting
at that Fib level. There was a pause at the .382 level,
but it was not sufficient to hold the market. Now look at
the rally from the support level near .618, it rallied but
did not exceed the prior high of 26.90 … As a general
rule, a retracement to .618 or below indicates that the
preceding upmove is losing steam. A shallow retracement
which supports at .382 is more likely to rally beyond the
prior high than one which has a deep retracement beyond
.50 all the way to .618 ..
The impressive thrust from 22.55 up to 26.90
was negated by a quick move back to .618 at about 24.20,
so a trader should not be too optimistic about a continuation
of the initial upthrust.
Similarly, the move up in June, from 23.50
to almost 26.50 would also not inspire much optimism for
a huge rally above the high of 26.50 … In general a
shallow support at .382 would indicate a probable rally
beyond the prior high. However, if the upmove preceding
the retracement was sluggish rather than thrusting, you
also should temper your enthusiasm.
If the second rally which only retraced to
.382 had the thrust of the first rally, it would be a more
attractive trade!
These are not firm rules, instead they are
used as a guide, to help you filter for better trades. Every
Fib level is not equal, some are more attractive than others.
Important notes from this lesson:
 Not all Fib levels are alike.
 No technical study is perfect, you must develop the
skills to filter out bad trades, and improve the odds
of finding better trades.
 Price action just before a Fib retracement can tell
you something about the future.
 Which Fib level causes the end of a retracement also
can give a hint to future price action.
 No technical study is perfect, you must develop the
skills to filter out bad trades, and improve the odds
of finding better trades.
You can learn more about Neal and his video
course by clicking here.
Good Trading
Best Regards
Neal Hughes
Website  www.fibmarkets.com
Email  members@fibmarkets.com
