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Fibonacci analysis, which is employed by practitioners of
various sciences such as astronomy, mathematics, and architecture, also
has a role in projecting price targets of financial securities.
CLASSIC EXAMPLE OF A DOWNTREND
Once a support level is broken, it acts as a resistance level.
The breaking of support and resistance levels coincides
with Fibonacci retracements.
Based on this principle, we can
conclude that breakout points represent important Fibonacci retracement
levels for subsequent corrections.
Therefore, price targets can be derived by assuming that a breakout point
is one of the Fibonacci
retracement levels, and that the trend should continue till it breaks a
support/resistance level (established by the Fibonacci retracement levels)
and starts a countertrend correction.
Like all indicators, the projected Fibonacci target is not a stand-alone
technique, but because of its effectiveness and accuracy in projecting
price targets, it should be one of the many tools in a trader’s toolbox
It works because same-direction market swings are often related by
Fibonacci ratios from the breakout point of previous support or resistance
levels. These points can be combined with sound money management
strategies to minimize risks and maximize profits
Projected Fibonacci targets use only four Fibonacci
ratios: 23.7%, 38.2%, 50%, and 61.8%. If prices break out of a horizontal
support/resistance level, apply the
following formula:
(Fibonacci
ratio * A – B) / Fibonacci ratio – 1
Where
:A
is the point where the first price swing
started
B is the point
where the first price swing ended horizontal support/resistance
Fibonacci ratio is one of the
following: 23.7%, 38.2%, 50%, or 61.8%
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