A popular tool commonly used by technical analysts is the Fibonacci Retracement. This the process of identifying potential retracements in price by using horizontal lines to indicate areas of probable support or resistance before the price continues in the direction of the prevailing trend. It is accomplished by drawing a trend line at a swing high, to a swing low (or vice versa), then dividing the trend line by key Fibonacci levels which are 23.6%, 38.2%, 50% and 61.8% and 100%.
This number sequence is named after Leonard Fibonacci, the greatest European Mathematician of the Middle ages, who discovered a series of interconnected numbers that are often observed in nature. Fibonacci’s original numbers are 0, 1, 1, 2, 3, 5, 8, 13, 21 etc. where each Fibonacci number is the sum of the previous two. (i.e. 5 + 8 = 13…8 + 13 = 21).
Below is an example using the Fibonacci Retracement Drawing Tool in NinjaTrader on the Daily E-mini S&P Futures Contract. The Retracement anchor points were placed at the:
- Swing Low of 1813.50
- Swing High of 2102
The key Fibonacci Levels are automatically drawn when creating the Retracement making it easy to quickly identify the Support Levels at 38.2% where price retraced on 3 separate occasions. Additionally, the 100% and 0% Fibonacci levels served and both Support and Resistance for the price action selected during this timeframe.
This chart was created using the free to download NinjaTrader software, powered by free end of day Kinetick data! Fibonacci trading principles can be used on any time frame and on any market. Download NinjaTrader today and see how incorporating Fibonacci levels into your arsenal can take your trading to the next level!