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Fibonacci Levels That Just Plain Work
02/24/2012 12:20 pm EST
Carolyn Boroden addresses the controversial question over why Fibonacci levels work, reveals her "go-to" Fibonacci level, and shares tips on how to draw and analyze charts with confidence.
Most every trade has heard about Fibonacci levels, but what’s the best way to use them? We’re talking with Carolyn Boroden today.
So Carolyn, first of all, why does Fibonacci seem to work so well in terms of where stocks, ETFs, and such seem to go to, bounce off, and come to as support? Fibonacci just seems to work really well. Why is that?
Well, it seems to be a natural phenomenon. There are some people who will tell you that it’s just that a bunch of traders are looking at the same exact levels, and it’s a self-fulfilling prophesy, but I really don’t believe that.
I’ve actually taken this down to one-minute charts, and I’ve seen these patterns unfold over, and over, and over again.
Now do you have a favorite level? Some people like the .618 or 1.27. Is there one that works particularly well?
I guess I would have to defer to the golden ratio, or .618.
Why do you think that is?
Well, that comes with going through the whole number series and the fact that within the Fibonacci number series, the .618 ratio comes in between these numbers as you go out to infinity.
A lot of people have trouble deciding where to draw the Fibonacci; from which low to which high. How do you kind of get experience in knowing what’s the best place to draw these lines?
Well, when I’m teaching people how to do it, I try to show them the key swing highs and lows, but if they don’t get it, honestly, I just have to go over 50 or 60 different charts and keep showing them the lows and highs that I would choose, and then see if they can replicate that.
Finally, do you look for confluence of Fibonacci levels on different time frames? So, if a Fibonacci level of .618 is drawn on a one-hour chart, and then on the daily chart, a similar level or another level matches that area, does that make it a stronger trade or area of support or resistance?
I think that would make it a stronger area, but typically what I’m doing is a confluence of levels on each time frame.
So, I may have a confluence of levels on a daily chart, but I’m also going to look for a confluence of levels on a 15-minute chart, and sometimes they will match up, and that will strengthen the trade.
Would you put more size on because of that or just be more likely to take the trade?
I think I might be a little bit more aggressive.
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