simple.

On the price scale, these ratios, and several others related to the Fibonacci sequence, often indicate levels at which strong resistance and support will be found. Many times, markets tend to reverse right at levels that coincide with the Fibonacci ratios. On the time scale Fibonacci ratios are one method of identifying potential market turning points. When Fibonacci levels of price and time coincide you have high probability entry points.

In the next few pages I will talk about how I use the two most common applications of Fibonacci:

• Price Retracements – A strategy for quality entry points

• Price Extensions – An approach to determining how far price will run

Then after we have covered the basics we will talk about bringing it all together and using both Fibonacci Retracements

and Fibonacci Extensions at same time and how clustering of these ratios increases the probability of profit.

Fibonacci Retracements:

The Fibonacci Retracement is probably the most heavily used Fibonacci tool in the toolset. You will find Fibonacci

Retracements as a solid tool in identifying key support and resistance areas.

If prices have fallen from a recent swing high down to a swing low, the expectation is that price should retrace distance, high to low, by a ratio ofthe Fibonacci sequence. . I have Fibonacci Retracements successfully used on tick charts through monthly and yearly charts. It is important to note, the larger price move from swing high to swing low, the more accurate the retracement projections. Identification and selection of the correct swing points are keys to success.

While there are many variations of the ratio set, simple is better, let’s focus on four major retracement levels.

• 23.6% — The shallowest of the retracements. In very strong trending markets price typically quickly bounces in

the area of this ratio.

• 38.2% — This is the first line of defense of the current trend. Breaking this level starts to erode the underlying

trend.

• 50% — the neutral point of any retracement. This is the critical tipping point.

• 61.8% — retracing to this typically signals a breakdown in the trend.

• 100% — matching the move

In this section we will also show examples of how potential opportunities when price retraces beyond 100% by following

another set of Fibonacci ratios:

• 138.2%

• 161.8%

• 200%

Notice in each case we have simply added 100% to the standard ratio set. I use this set of retracements on a daily

basis, from 23.6% all the way to 200% and sometimes 300% For my style of trading I find 38.2%, 50% and 61.8% quite

reliable.I use the other primarily as confirmation levels.

So let’s take a look at some examples of Fibonacci Retracements in use.

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