#### Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

# Correct way to use Fibonacci lines

What is the correct way to use Fibonacci lines? Uptrend / Downtrend
I get so confused on this subject I not able to formulate a question. I have read the information from StockCharts.com and I understand the mathematics, just don't understand the application. I guess when you try to put a round peg in a square hole you can expect this type of problem.

Anyway, your help would be appreciated.

All the Best,

Gary Bird

• mod
I'm assuming you've read the SC documentation for using the annotation tool, but for others, here's the link:

https://support.stockcharts.com/doku.php?id=chartnotes:line_studies

There doesn't seem to be a consensus on how to apply fib lines. Which low do you pick as a starting point, or which high? And there seems to be no logic to explain why they should work, other than the fib ratio occurs in nature a lot, so there must be something to it.

One thing is clear, and that is fib lines do not function like a law of physics. There are no exceptions to physical laws (well, none that you can see without spending billions of dollars on amazing equipment). But stock prices will breeze past fib lines, or stop right on them, or go by them and then turn around, no matter how you draw them.

So they would seem to be useless, but they are not. Prices do turn often enough at fib 23, or 38 or 62 that it's worthwhile knowing where those levels are. They seem to work best where price action itself suggests a turn. So, for instance, in a retreating up leg, if fib 38 is near a down close where price paused before going higher, that down close is more likely to be support again.

Since fib ratios seem to be fractal - meaning they apply at any scale, you can choose to draw them anywhere you like. Your choice would depend on the type of trade you are looking for - short-term, medium term, long term - in the time frame you choose.

A good starting point is a low - meaning a lower low preceded and followed by higher lows - and a good ending point is a high - i.e. a higher high surrounded by lower highs. The grid is "good" until the base - the low for an up leg fib - is broken. If the high is broken, just extend the grid to the new high. Look for possible reversals at the fib levels, typically 38 and 62. The types of candles you see at those levels, e.g. a doji, or a down bar closing up, etc. and whether there is support to the left, would help decide whether there is a reversal building.

Here are a few examples from \$SPX:

Note there is actually no grid until there is both a low and a high, so the bars that matter are the ones that follow the high. Any intersections with the fib grid in the up leg (between the low and the high) have no meaning.

• ✭✭
In my opinion, there is really no application. It's just an indication of a retracement area. If you understand Stochastics or any other oscillating price indicator, you may note that they tend to be Bullish in appearance above the 40 or 50 level and bearish below the 40 or 30 level.

The 50 level, depending on the settings of the indicator will be a reference for the 50% retracement. The 38 level, a 62% retracement. 75 a 25% retracement. The Fibonacci numbers and lines are just reference or alert lines to be aware of.

I like Gerald Appel's "magic numbers". These are prices that he observed tend to provide levels of support and/ or resistance over time. I place them on all of my charts as Horizontal Lines. It's quite remarkable how useful they are to me. I used to put Price Channels on my charts, but using the Horizontal "magic numbers" cleans out the need for that indicator on my charts.

I include a summary below:

ARE THERE REALLY SUCH THINGS AS “MAGIC NUMBERS” IN THE STOCK MARKET?

COULD BE. WHAT THEY ARE AND HOW TO USE THEM…

Magic numbers? As we said, “could be”. Could also be just our imagination. But, we have observed over the years that certain areas, time and time again, serve as resistance points for stocks moving up and as support levels for stock moving down -- acting, so to speak, almost as magnets for price moves. Doesn’t work all the time, of course. But often enough to pay attention.

CHARACTERISTICS OF MAGIC NUMBERS:

I have observed empirically over the years that stocks tend to find support, at least temporarily in certain price zones, and to stop advancing at those same price zones, at least temporarily. In fact, I frequently use these zones as selling and buying targets as a result of my observations.

These zones tend to be spaced roughly 15-20% apart from each other. Once a stock has passed through the zone, it generally moves rather rapidly, after perhaps a retracement to the top of the zone just passed, onto the next zone. Trading ranges tend to form between zones. Occasionally, false breakouts above these magic numbers do occur, but if the breakout is false, retracements back beneath the magic number are rapid, churning taking place near the top of the zone prior to a decline.

Breakout buyers might purchase issues as soon as they cross through a magic number, or upon the normal retracement back to the top of the zone. Very frequently, a quick 15% or so ride develops. It can, however, be very dangerous to purchase a stock immediately upon its attaining a magic number, unless and until a consolidation period has taken place. Better to await a reaction to the top of the previous magic zone.

WHICH ARE THE MAGIC NUMBERS?

Give or take a fraction, perhaps 1 or 2 points on either side, the higher the price stock the greater the variation, these are the magic zones I have observed.

8 20 ¼ 44 88

10 24 ½ 49 ½ 99

12 ¼ 28 ¾ 55 110

14 33 65 130

16 38 ½ 77 154

In other words, if a stock crosses 28 ¾, you can be fairly certain of its attaining a price objective of 32-33, particularly if the break above 28 ¾ seems at all decisive. Should the stock reach say 29 ¾, it may retrace back to the 28-29 area, but could be purchased then for the move to 33, given no other contraindications. The numbers, 24 ½ through 65 seem particularly significant -- many declines halting at the tops of those zones and advances halting likewise, but just beneath the tops.

By Gerald Appel
as written in Systems and Forecasts

• ✭✭
Apparently you can put Fibonacci Pivot Points on a chart to see them in action.

https://school.stockcharts.com/doku.php?id=technical_indicators:pivot_points
• mod
edited October 2020
One additional comment on fibs - you can use them "dynamically" on lower time frames - say hourly or five minute.

Start with any bar that fits the definition of a low or high (as described in my previous entry). As the next bar prints, extend the grid if the new bar exceeds the zero line, or look for a retracement to a grid line (23, 38, 50, 62, 78) for a possible entry. If you get the retracement, look for reversal behavior (e.g., a doji below the 38 line, closing above the mid point, then consider an entry back above the 38).

For instance, starting from a low, imagine a long body up close prints on good volume. Draw the fib from the low to the high.

Next bar is another long body up, also on good volume. Extend the grid up. Note to the left that we have crossed an up close in the previous down leg. That could be support if we come back to it.

Next bar is a down bar closing below the 23 on smaller volume. Not an entry because we haven't seen reversal behavior (but if the market is very strong - no wicks, good range and volume to the up side, few second down closes, buyers are not waiting for reversal behavior, so it could be an entry - but for this example let's say they are waiting).

Then another down bar with a small tail closing below the 38 with a little more volume. Some evidence of buying, maybe.

Then a doji with a longish tail closing up but below the 38, on weak volume. That's reversal behavior. Looking left we are just above or below the crossed up close in the previous down close (so there was buying interest at this level before).

Next bar opens up, moves above the 38 and volume is good. It appears to confirm the reversal behavior, so that's a possible entry.

Any entry can fail - good reversal behavior and follow through do NOT guarantee a successful trade, but the odds are better.

This can work on a daily chart, too, maybe even weekly, on stocks that aren't too choppy. Holding overnight can be a problem on charts that gap a lot.