How to draw Fibonacci levels

Fibonacci retracement and extension analysis reveals the hidden support and resistance created by the golden ratio.The pre-packaged Fibonacci grids in most charting programs list these price levels. They function like traditional support and resistance, but are derived from mathematical proportions, rather than highs or lows on the price chart. Many traders and investors consider Fibonacci to be voodoo science, but its natural origins reveal poorly understood aspects of human behavior.

Fib math emphasizes proportion, capturing the essence of beauty and packaging it into a set of proportions that can define the facial structure of shells, flowers and even Hollywood actresses. This analysis extends to the measurement of trend and counter-trend fluctuations, which form proportional ranges, pullbacks, and reversals.ofIn its market applications, Fibonacci measures crowd behavior and willingness to buy and sell securities at key retracement levels. It also identifies key reversal areas and narrow price ranges where trending markets should lose momentum and switch to trading ranges, top or bottom patterns.

Fibonacci supports multiple profit strategies, but incorrect grid placement can undermine forecasts and confidence. Traders will feel frustrated the first time they try this tool because it does not work perfectly and will usually abandon it in favor of a more familiar analysis. However, durability, precision and a little fit can produce a lifetime trading advantage.

Use the retracement grid to analyze pullbacks, reversals, corrections, and other price actions within the main uptrend and downtrend ranges. Use the extended grid to measure the extent to which an uptrend or downtrend may exceed the breakout or collapse level. This analysis forms the basis for establishing technical price targets and profitable exit zones.

Set retracement grid

Setting up the Fibonacci grid correctly requires skill. Choosing the wrong level as the starting point and ending point will encourage buying or selling at meaningless prices, thereby undermining profitability. The process also requires a multi-trend grid layout, placing successive levels in a longer and shorter time frame, until they capture the price range that may play a role in the life of an open position.

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Start grid placement by zooming out to weekly mode and finding the longest continuous uptrend or downtrend. Place the Fibonacci grid from low to high in an uptrend and from high to low in a downtrend. Set up a grid to display .382, .50, .618 and .786 retracement levels. The first three ratios act as a compression zone, where prices can rebound like a pinball, and .786 marks a line in the sand, and violations of the rules indicate that the trend has changed.

Now turn to short-term trends and add new grids to these time frames. When finished, your chart will display a series of grids where the lines are closely aligned or not aligned at all. Close alignment determines the harmonic support and resistance levels that can end the correction and signal trend progress, higher or lower, especially with the support of moving averages, trend lines, and gaps. Loose alignment points to chaos, and conflicting forces produce a washout that reduces predictive power and profit potential.

Delta Air Lines 60-minute retracement grid

Fibonacci grids are equally valid in uptrends and downtrends, and in all time frames. In the chart above, Delta Air Lines (DAL) sold at between US$48 and US$39 in two different waves. Placing grids on long-term declines can highlight key harmonic resistance levels, while stretching the second grid on the last selling wave can reveal hidden alignments between time frames.

The .382 retracement of the longer wave (1) is narrowly aligned with the .618 retracement of the shorter wave (2) at (A), while the longer .500 retracement is aligned with the shorter .786 retracement at (B) Withdraw perfectly aligned. It rebounded from the June low to the lower line (A) and stagnated for 7 hours, and finally broke through the upper line (B), and the rebound ended.

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If you choose the wrong level for the starting and ending points, it will encourage buying or selling at unreasonable prices and hurt profitability.

Set up the expansion grid

The expanded grid is most effective when the ratio is constructed from a trading range that shows clearly defined pullback and breakout levels. For an uptrend, extend the grid from the swing low in the range and extend it to the breakout level, which also marks the high of the range. Click once to build this grid, and a second grid will appear. Start this grid with a breakout price and stretch it higher until it includes the Fib ratio that may play a role in the life of the transaction.

Reverse this process to obtain a downward trend, starting from the swing high and extending it to the breakdown level, which also marks the low of the range. Click once to build this grid, and a second grid will appear. Start the grid with subdivided prices and pull it down until it includes Fib ratios that may play a role in the transaction life cycle. Downstream grids may use fewer ratios than upstream grids because the expansion can go to infinity but not below zero.

Apple expands the grid every week

Apple (AAPL) ended its historical uptrend (B) and entered a long-term trading range, bottoming out at (A). It rebounded to range resistance and broke through two years later, allowing technicians to use trading range lows (A) and highs (B) to construct a weekly expansion grid. The ratio constructed from this 46-point swing (101-55 = 46) shows that the harmonic resistance is located at 130 USD (.618), 145 USD (1.00) and 173 USD (1.618). A few months later, the stock peaked at the .618 Fibonacci extension and then sold to $101 to test the breakout support.

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The value of fit

Reduce your workload by focusing on the harmonics that play a role in the life cycle of the position, while ignoring other levels. For example, it is meaningless for day traders to worry about monthly and annual Fib levels. However, do not assume that a longer time frame is irrelevant, because trading that lasts for several weeks may reach the harmonic level of 5, 6 or 10 years, when it is already close to the long-term level. Before deciding which grids are needed, you can usually manage these outliers by quickly browsing weekly or monthly charts.

Finally, if necessary, continue to make some adjustments to align the grid more closely to draw landscape features such as gaps, highs/lows, and moving averages. Move the starting point to the next most obvious high or low and see if it is more in line with historical price movements. In practice, this usually means choosing a higher double bottom low or a lower double top high.

Bottom line

Construct Fibonacci retracements and expansion grids to identify hidden support and resistance levels that may play a role during the life of the position. When the grid ratio is closely integrated with other technical elements (including moving averages, gaps, and previous highs/lows), the most reliable Fibonacci reversal signal will appear. Use the retracement grid to build detailed entry and exit strategies, and use the extended grid to locate price targets and re-adjust risk management parameters.

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