Understand & Use Fibonacci Ratio’s Part.2

Retracements & Projections Retracements & Projections
by Sunil Mangwani

• The basic use of Fibonacci retracements is to find potential levels of support or
resistance “behind” the market. If the market is moving up and making new
highs, Fib retraces will draw levels BELOW the current price.
Ideal situation to use in –
• To estimate the horizontal levels of support/resistance for a pullback in an
existing trend.

Plotting Fib retracements
• The Fibonacci retracements are calculated by taking two extreme points
(usually a swing high and swing low) on the price movement and dividing the
vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and
100%.
• Once these levels are identified, horizontal lines are drawn and used to identify
possible support and resistance levels.
• The direction of the prior trend is likely to continue once the price has retraced
to any of the ratios.

Fib retracements – the 0.786 level Fib retracements – the 0.786 level
• Of all the ratios, the 0.786 level holds a lot of importance.
• This number is the square root of the “golden number” 0.618, and hence acts
as a very strong level of resistance / support.
• When we are looking at a change of trend, it is best to wait for price to break the
fib retracement of 0.786.
• This is the level, from where price has a very high probability of retracement.
• The 0.786 is thus known as the “reversal” fib level.

Use of the Fib retracements for Entry & Stop
• For price in an existing trend - when we are looking for a pullback to rejoin
the existing trend.
• In case of an uptrend, we plot the Fib retracement ratios on the previous
existing up trend.
• If the pullback is held within the Fib retracements, and if price does not break
the 0.786 level, then the indication is that price should resume the up move
again.
• So the break of the 23.6 level should be considered to be the entry, with the
stop below the 61.8 level.
• The assumption is that if price has broken the 23.6 level, then it has gathered
sufficient momentum to resume the move in the direction of the existing trend.
• Hence, the probability of price moving back down to the 61.8 level is quite
remote…….which becomes the correct technical level to place the stop.

Fib projections –
• The Fibonacci projections are used to determine the expected price targets,
once it has crossed the Fibonacci retracement levels.
• If we are anticipating price to begin an uptrend, we can use the last prominent
down wave to determine the expected upside targets.
• Thus we are projecting the price action forward, using the last prominent
moves.
Ideal situation to use in –
• For estimating the price targets after the pullback is completed. We project the
price action forward, estimating that it will reach the fib levels.

Plotting Fib projections – Plotting Fib projections –
• The Fibonacci projection is calculated by taking two extreme points (usually a
swing high and swing low) on the price movement and adding the key
Fibonacci ratios of 1.272%, 1.618%, 2.000% & 261.8%.
• Once price has crossed the levels of the swing high or swing low, the above
mentioned projection levels identify possible support and resistance levels.
• Of all the ratios, the 1.272% & 1.618% levels hold a lot of importance, since they
usually act as very strong levels of resistance / support.

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