The Fibonacci Tool

The Fibonacci Tool

A commonly used technical analysis tool across the globe.

Fibonacci does not have to sound Greek. The natural numbers (0, 1, 2, 3, 4, 5, 6, 7, 8, 9) owe their introduction to Europe to a thirteenth century mathematician named Leonardo Fibonacci. Fibonacci might be famous for a lot of things, but it is the technical analysis tool - the Fibonacci Retracement - that is both relevant and important for us stock traders.

Stock traders love the Fibonacci tool because it is so popular among traders. It is a known fact that when a multitude of traders do the same thing, this will shift the market in a certain direction. This is true of Fibonacci and it is why traders use it as a sought after tool to reap rewards.

Not everything is rosy about this tool as you might have guessed (especially if you are a regular reader of my blog posts). The problem with the Fibonacci tool has to do with the subjectivity of the identification of the swing highs and swing lows in a stock's trend. Additionally, Fib levels are nothing more than support and resistance levels. Every support and resistance level will be broken and this will cause problems for traders.

Still, the Fibonacci tool is important to know about and should be used along with other tools for greater accuracy. Here is how to use the Fibonacci tool:

Identify a swing high first: this is a candle with at least two bars with lower highs on either side. The swing low bar is similar but it has higher lows on either side. Take a look at the image:


This is a great trading opportunity for an investor who has spotted the Fib levels. Watch for confirmation by way of the bounce which came off here at the 50 percent Fib level.

It is in trending markets that Fibonacci levels perform the best since the price will usually get support in an uptrend and continue to surge.