HOW I USE FIBONACCI (page 3)

Now, in theory, if price always bounced at its fib levels, the volatility would leave and the price would flat line at a particular value. So in our example above, lets say the price bounced off of 52, which is the 50% fib. That would establish an intermediate low. Now the low is 52 and the high is 54. If it starts back up and bounces off its 50% fib again, it would hit 53 and establish a new high…..and on and on till the levels are infinitesimally small, and the price would stabilze and not move any more. But this doesn't happen in real life. Support and resistance levels were made to be broken. If all three fib levels are broken, then you look for the high or the low to hold, if that too is broken, you must widen your window so to speak, and redraw you fib levels from a larger perspective, and look for those to hold.

Again, its important to use fibonacci analysis in the context of your own trading. For instance, an "investor" may be using fib analysis on the monthly charts. That may be fine for him, since he's not interested in the intraday jiggles. But for a daytrader, that is too big of a window. A daytrader should be looking at intraday charts and daily charts for his overall picture.

I always have up a 7 day, 5min intraday chart of the stock I'm interested in. I draw the levels off the highs and lows of this chart. I do not base my buying or selling on these fibonacci levels alone, but rather I look for other confirming signals to go along with it. I like a to see a confluence of indicators before making a commitment. I'll get more into confluence in a later lesson. But when price hits one of these fib levels, my radar goes up and I begin looking for a reversal.

If you want to get proficient at this type of analysis, you should practice this technique on old charts as well as in real time to get the feel of it. You will be amazed at the bounces you will see at the fib levels. It takes some practice.

One other thing I want to add. Many people say "Well, its nothing but a self-fulfilling prophecy….blah, blah, blah."

Well, in some cases it may be. But who cares if it was? If it works why not use it? I personally don't believe it's a self-fulfilling prophesy for two reasons.

1) Everyone has their own profit objectives, so not everyone is going to buy and sell at the same time. You have scalpers, momentum traders, swingtraders and investors out there, all with different objectives.
2) Even before fibonacci analysis in trading was popular, price action was supported at the fib levels. You can see this in very old charts from hundreds of years ago.

Let's look at some examples.