STRATEGIES

Traders and investors in all markets can benefit from this timeless analysis technique, which is highly useful in determining entry and stop levels in multiple time frames and all market conditions.

One tool that many traders and a majority of investors do not include in their investment or trading decisions is Fibonacci analysis. Though some have not been exposed to this type of analysis, many others dismiss it when they find that it is based on the work of a 12th century mathematician or because they think it is too complex.

Both traders and investors have trouble finding good price levels to enter the market and determining where to place their stops. A mistake in either area can ruin the chances of a profitable outcome, and most fail because they do not have an objective way to determine either price level.

This is where the most basic level of Fibonacci analysis can be very helpful, whether you are investing in stocks or ETFs, or even daytrading the forex market.

Without diving too heavily into the math, Fibonacci analysis is based on a series of numbers developed by Italian mathematician Leonardo Fibonacci in the 12th century.

From a trading perspective, there are many basic and advanced ways that Fibonacci numbers can be beneficial to the trader. Suffice it to say that this series of numbers and the relationship of one number to another in the series have been found throughout nature. The most notable relationship can be found by dividing one Fibonacci number by the next one in the series, which will give you the "Golden Ratio" of 0.618.

There are two primary ways that I use Fibonacci analysis in my trading. One is to identify or confirm support or resistance levels, and the other is to help identify price targets. In this article, I will concentrate on identifying levels of support and resistance.

Often times, a trader will look at a market and realize that when they were not paying attention, a significant level of support or resistance was broken and the market has already moved significantly. Fibonacci analysis can be very helpful in this situation.

Figure 1

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The first example is NetFlix, Inc. (NFLX) from late 2008 and early 2009, however, similar Fibonacci relationships can be found in any liquid market. I have used it on commodities, stocks, mutual funds, and the forex market for many years and have found it to be quite valuable.   

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Tickers Mentioned: Tickers: NFLX, BAC, FCX