Advanced Fibonacci Applications

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Advanced Fibonacci Applications

There is more to Fibonacci than the more well-known retracements, arcs, fans, and time zones. Every year, new strategies for traders to take advantage of the market’s uncanny proclivities for golden ratio derivatives are devised.

We’ll look at some of the most common alternate applications of Fibonacci, such as extensions, clusters, and Gartley’s, and how to combine them with other patterns and indicators.

Key Takeaways

  • Fibonacci analysis is a collection of technical trading tactics based on the Fibonacci numbers, sometimes known as the “golden ratio.”
  • The Fibonacci sequence starts with zero and one and adds the preceding two numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377, and so on.
  • Extensions, channels, and clusters are more complex Fibonacci procedures than retracements, arcs, and fans.

Fibonacci Extensions

Fibonacci extensions are essentially ratio-derived extensions over the typical Fibonacci retracement threshold of 100%. They are widely used as forecasting tools and are often combined with other chart patterns.

A Fibonacci extension prediction is seen in the graphic below.

Investopedia / Sabrina Jiang

The example above shows how the Fibonacci extension levels of 161.8% and 261.8% may be used to predict future regions of support and resistance.

The initial points (0-100%) were utilized to project extensions at 161.8% and 261.8%, which functioned as future support and resistance levels. Many traders combine this with wave-based research, such as the Elliott Wave or Wolfe Wave, to anticipate the height of each wave and more precisely characterize the individual waves.

Fibonacci extensions are often employed in conjunction with other chart patterns, such as the ascending triangle. Once the pattern has been identified, a prediction can be generated by multiplying the entry price by 61.8% of the distance between the top resistance and the base of the triangle. As seen in Figure 2, these levels are often regarded as critical points for traders to consider taking gains.

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Investopedia / Sabrina Jiang

Many traders utilize the Fibonacci extension level of 161.8% as a price objective when a securities breaks out of a chart pattern.

Fibonacci Clusters

The Fibonacci cluster is the accumulation of Fibonacci retracements from important highs and lows over a specific time period. The y-axis is then displayed with each of these Fibonacci levels (price).Each overlapping price level leaves a darker impression on the cluster, allowing you to identify the most important Fibonacci support and resistance levels.

Investopedia / Sabrina Jiang

On the right side of the chart above, you can see an example of a Fibonacci cluster. Dark stripes are said to have greater sway on degrees of support and resistance than light stripes. Take note of the significant resistance right above the $20 mark.

Clusters are often used by traders to determine support and resistance levels. Combining a “volume by price” graph on the left side with a cluster on the right side is a common strategy. This helps you to identify which Fibonacci sections indicate powerful support or resistance—high-volume, dense areas are critical levels of support and resistance.

To validate support and resistance levels, employ this approach in combination with other Fibonacci techniques or chart patterns.

The Gartley Pattern

The Gartley pattern, which combines the “M” and “W” tops and bottoms with different Fibonacci levels, is a lesser-known design. As a consequence, the indicator is a solid predictor of future price fluctuations. The Gartley formation is seen in Figure 4.

Investopedia / Julie Bang

Gartley patterns are created by applying numerous principles to the distances between points:

  • X through D: Must account for 78.6% of the segment range. XA
  • X to B: Must account for about 61.8% of the XA section.
  • B through D: The range BC must be between 127% and 161.8%.
  • A to C: Must be 38.2% of XA segment or 88.6% of AB segment.
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How do you calculate these distances? One method is to estimate the points using Fibonacci retracements and extensions. To compute the values, you may use use ChartSetups.com’s free Excel-based spreadsheet. Many traders also use proprietary software, which often includes tools designed expressly to detect and exploit the Gartley pattern.

Fibonacci Channels

As seen in Figure 5, the Fibonacci design may be applied to channels not only vertically but also diagonally.

Source: MetaTrader.

As seen above, using Fibonacci retracement in conjunction with Fibonacci channels may provide a trader with further confirmation that a certain price level will operate as support or resistance.

Again, the same ideas and regulations apply to these channels as they do to vertical retracements. Traders often use a mix of diagonal and vertical Fibonacci studies to identify situations where both suggest considerable resistance. This might signal that the current trend will continue.

The Bottom Line

Fibonacci patterns are most effective when combined with other patterns and indicators. They often provide a specific point to a broader movement. A Fibonacci extension will offer you a particular price objective, but it will be meaningless unless you know when a breakout is probable. The Fibonacci price objective is validated by the triangle pattern, volume confirmations, and an overall trend evaluation.

You may boost the likelihood of a successful trade by combining indicators and chart patterns with the various Fibonacci tools available. Remember that no one indication can anticipate everything accurately. When many indicators trend in the same direction, you may get a solid picture of where the price is heading.

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