To put it simply - each level is a ratio between two other numbers, and there are countless examples of them being respected in the stock market, forex, crypto, - you name it. For this reason, it's an essential tool in the technical trader's toolbox.
There are many uses for this tool:
- Finding regions of support or resistance
- Helping with stop loss placement
- Establishing targets to take profit - especially during price discovery (no existing S/R levels)
Rules of Thumb
While placement of your anchor points is somewhat subjective - a rule of thumb is to stick with glaringly obvious swing points.
Simple is best with this tool - one of the reasons that it works is that other traders (or trading algorithms) are watching the same regions of price as you are. No need to overcomplicate it!
For a retracement (+ targets) - begin your Fibonacci at a swing low, and end it at a swing high.
For a retracement (+ targets) - begin your Fibonacci at a swing high, and end it at a swing low.
Personalizing Your Settings
The way I have my tool configured, it includes some trend-based Fibonacci extensions in the calculations as well. This can be done by opening your Fibonacci settings and adjusting the inputs. The levels I have as inputs are as follows:
- 0 - This is your starting point
- 0.236 - The shallowest retracement
- 0.382 - Shallow retracement
- 0.5 - While not a Fibonacci number, this is the midpoint of your swing
- 0.618 - Commonly referred to as the "Golden Pocket" - this is generally a very important region of .
- 0.705 - While not a Fibonacci number, this is the midpoint between the 0.618 and 0.786 - a level that tends to see lots of activity, and is thus included in my settings.
- 0.786 - This is the deepest retracement before a full retrace.
- 1 - This is your ending point
- -0.27 - While not a Fibonacci number, a very commonly used extension target during price discovery - Target #1.
- -0.414 - While not a Fibonacci number, a very commonly used extension target during price discovery - Target #2.
- -0.618 - This is your golden ratio - Target #3 during price discovery .
- -1 - This is a 100% extension of the distance between your starting & ending point.
- etc, etc - you can extend as far as you like!
Where Fibonacci extensions really shine is during price discovery - areas where there are no previous levels of support or resistance (new ATH's).
You can see on this $SPY chart - using our Fib tool on the COVID crash gave us some very accurate upside targets for the subsequent rally into new ATH's.
I hope this introduction to the tool on TradingView helped you develop a basic understanding of it's applications - make sure to like if you learned something and follow us for more!
Will, OptionsSwing Analyst