Fibonacci Number and Ratio Analysis
Diagonal‐type indicators like trendlines are dynamic, that is, they have a time element
in determination of the current price. Moving averages are also dynamic in nature as
the current moving average price is a function of time. That is why is it very difficult
to forecast the exact price at which a trendline or moving average violation will occur.
The steeper the trendline or angle of ascent of a moving average, the more difficult it
is to predict the price at which a breach would occur, as small price movements could
result in a very wide range of possible prices at which a breach could occur.
As support and resistance, the price at which a Fibonacci level would be
breached is known long in advance. This makes it very convenient for the place-
ment of stoplosses and profit targets. Fibonacci levels are traded in exactly the
same way as conventional support and resistance levels. Traders may use a Fibo-
nacci level as an:■ (^) Entry
■ (^) Stoploss
■ (^) Profit target
10.15.1 Fibonacci Level as a profit target, entry, and
stoploss Level
Once a trade is initiated for whatever reason, a Fibonacci level may be used as a
profit target, exiting positions in full or partially. As prices approach Fibonacci
retracement, extension, expansion, or projection levels, traders may want to
start tightening their stops in anticipation of a correction or some larger rever-
sal. In Figure 10.51, an entry is initiated at the break of the uptrend line in Gold
on the four‐hour chart. A Fibonacci price projection is made based on the range
BC, projected downward from point E. We see price testing the 161.8 percent
projection level at point D and rapidly pulling back to higher prices. A trader
would be wise to exit or at least roll down the stops on a short position as priceFigure 10.51 Fibonacci Level as a Profit Target, Entry, and Stoploss Level in Gold.
Source: MetaTrader 4