Fibonacci Arc

The Fibonacci Arc is a trend line tool, used to identify support and resistance. It works best on all markets and time frames.

The arc is drawn by placing a trend line between two points (usually a trough and opposing peak). Centered on the second point, three arcs are displayed. The arcs intersect the trend line at 31.8%, 50.0%, and 68.2% - at the Fibonacci levels.

Thousands of years ago, mathematicians discovered that a certain number kept appearing throughout the natural world. It was the ratio describing how flower petals grew around their central stem, how a snail's shell swirled around its origin and how a galaxy extended from its core. More importantly for the financial community, this ratio described how consecutive numbers related to each other. This "golden ratio" of .618 was applied to numbers by the thirteenth century mathematician Leonardo Fibonacci.

The Fibonacci sequence starts like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ..., where any number in the sequence is equal to the sum of the preceding two numbers. The ratio of any two consecutive numbers starts out by oscillating around .618 and approaches it exactly as the sequence continues.

So what does this have to do with trading? Actually, Fibonacci numbers are really one aspect of trading with Elliott Waves and Gann Angles but those are topics for other editions of "Tips." As we know, markets trend up and down, pause to retrace (consolidate, correct) then continue onward. These retracements often reclaim constant percentages of the original trend's move and can be predicted with good accuracy by the Fibonacci sequence.

The ratios of consecutive numbers at the start of the sequence are 1.00, .50 and .67. Market technicians have long known that market retracements tend to end at the 50% level as well as at one and two thirds. A retracement of 100% of the move provides a very strong support/resistance line. All of these are Fibonacci levels. The one and two thirds levels are really approximations of the Fibonacci ratio 61.8% and its inverse. As you can see, Fibonacci levels are simply refined versions of what traders have been using for years.

Reference: "Real World Technical Analysis", published by Commodity Research Bureau

Draw a Fibonacci Arc

  1. Right-click on the chart to display the context menu, and select Fibonacci Arcs.
  2. Placing your cursor where you wish the arc to start, left-click and drag over the chart, releasing your mouse where the arc should end.