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Fibonacci analysis is a great way to improve your analytical skills when trying to identify support and resistance levels. Fibonacci analysis is based on the Fibonacci series of numbers. These numbers have been developed and explored by mathematicians for centuries and are named after Leonardo of Pisa (Fibonacci) who did a lot of work to popularize them in 13th century Italy.

The number series starts with 0 and 0 and then is continued by summing the previous two numbers in the series. For example, here are the first few Fibonacci numbers.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584…

As traders, we are not actually interested in the numbers in the series. What is important to traders are the ratios, or differences, between the numbers in the series. These are called Fibonacci ratios and can be used to identify likely support and resistance levels.

The most popular Fibonacci ratios or levels are 23.6 percent, 38.2 percent and 61.8 percent. In addition to the standard Fibonacci ratios, there are two other levels—50 percent and 100 percent—that are often included in a Fibonacci analysis, although they only appear as a Fibonacci ratio at the very beginning of the series. You can also use other Fibonacci ratios, but it is up to you to decide how far you want to take the analysis.

Fibonaccis on the Chart

When drawn on a chart, Fibonacci levels divide a trend into segments. Each of these segments becomes a likely support or resistance level. In the chart that follows, you can see a Fibonacci retracement applied from the bottom to the top of a recent trend on the EUR/USD. You can see that the market has been bouncing up from the 23.6 percent and 38.2 percent retracement levels for a few months. The interesting thing is, these were identified in advance—which enabled them to serve as excellent guides for placing stops or entry orders.

Fibonacci Analysis—Fibonacci Retracement Levels

In the previous chart, you saw how Fibonacci levels can be used to divide a trend into horizontal support and resistance levels, but they can also be used to create diagonal support and resistance levels. Diagonally trending Fibonacci levels are called Fibonacci fans and are applied the same way that the horizontal versions are.

Fibonacci Analysis—Fibonacci Fans

In the previous chart, you can see the market channeling between the 50 percent and 38.2 percent lines for nearly a month. This kind of Fibonacci analysis is helpful when trying to establish where a trending market is likely to begin consolidating or encounter a support or resistance level.

Fibonacci levels can be spectacularly predictive, but there is a danger here as well. Like all support and resistance analysis, Fibonacci analysis can aid you in making predictions, but it is not foolproof. Breaks happen, and you should be prepared to handle a bad trade just as you would with any other analysis.

Tips for Using Fibonacci Analysis:

1. Fibonacci levels are usually drawn from the bottom to the top of a trend in a bull market and from the top to the bottom of a trend in a bear market. Some traders will base their analysis on the wicks of the top and bottom candles, and other traders will ignore the wicks. We like to include them because they represent the true extremes of market sentiment, but you should develop your own style.

2. Fibonacci levels can be used across different timeframes. It is just as useful for longer-term trades on the daily charts as it is for shorter-term trades on the hourly charts.

3. Although 50 percent is not a Fibonacci ratio, it is extremely useful and is usually included in the analysis.

4. Combining horizontal Fibonacci levels and Fibonacci fans can be very helpful, but it may lead to over-analysis. When in doubt, it is usually best to simplify your analysis.

Make sure to watch the video above, and then continue to Price Patterns

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Kirkland Brown  - Useable Time Frame   |2009-07-15 06:30:46 As Far as drawing the fibonacci from both extremes on the chart, how inclusive should the time frame be? For example, if I use a 10 day 15 minute chart, will I miss an extreme that may occur on the 11th and older day? Also, do you draw the line from right to left or vice-versa. Thank you for an informative video v/r Kirk

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