Fibonacci retracement numbers can help traders determine price targets and get a sense of whether a market will continue a trend.
There is beauty and symmetry in nature. There may be clues to the markets, as well.
So-called Fibonacci numbers, a favorite among many technical traders, apply numeric sequences and ratios to help ascertain price targets and offer a sense of whether a market move has run its course. The system takes its name from Leonardo Fibonacci, a 13th-century Italian mathematician. Some say Fibonacci ratios appear throughout nature, in the spirals of a seashell or the seeds of a sunflower, for example.
For our purposes, we’ll stick to how this concept applies to trading. What exactly can these numbers tell a trader?
How Far Might a Price Pullback Go?
Markets don't move in straight lines. There are zigs and zags along the way, as well as periods of sideways grinding. When a stock is in an uptrend, it often retreats, or corrects, for a period of time before advancing in another wave up.
Fibonacci retracements can help pinpoint how far a stock might fall before resuming its prior trend. Although there are some variations, three widely used levels are 38.2%, 50%, and 61.8%. We'll just stick with the basics here. These percentage retracements can be applied to pretty much any time frame: days, weeks, and even hours.
Often a retracement in the neighborhood of 61.8% from a recent peak can act as a support level during a short-term decline. Buying interest then emerges, and the market bounces back.
Look Out Below?
Technical traders often talk about the need for “confirmation,” which means using several different technical indicators in tandem. Like any other technical tool, percentage retracements should not be used in a vacuum.
Technical traders believe that, if combined with other indicators like trendline analysis, moving averages, or other tools, retracement targets can indicate if a trend is ending and a top or bottom is forming. Traditionally, technical traders point to the 61.8% retracement as the “maximum” level that a market should correct if the previous trend is to remain intact.
What does this mean? Simply put, a break or decline under the 61.8% level is the last “line in the sand,” and suggests that a trend is ending. From there, technical traders often target a complete (100%) retracement of the move from the starting point of the initial rally.
So, whether your average chart is as lovely to look at as a seashell may be debatable, and when it comes to the markets, it may seem more like it's a jungle out there. But intelligent use of technical tools such as Fibonacci numbers can help you see things more clearly.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.