Stock prices usually zig and zag instead of moving in a straight line. Today we’ll explore Fibonacci retracements, a popular tool for navigating ups and downs in your trading.
The Fibonacci (“Fib”) tool is a drawing instrument on TradeStation’s charts that draw lines for potential pullbacks. It’s based on a series of numbers discovered by medieval mathematician Leonardo Fibonacci. While the calculations are complicated, their use in the market is relatively straightforward.
Fibonacci Retracement Levels
Simply put, the Fibonacci trading looks for stocks to give back, or “retrace,” certain amounts of a move. They’re based on percentages of the advance or decline. The Fibonacci tool looks for retracements of:
- 23.6 percent
- 38.2 percent
- 50 percent
- 61.8 percent
- 76.4 percent
Bullish traders can use these countertrend moves to identify pullbacks in an upward-trending stock they’d like to buy. Bearish Fibonacci traders can look for potential rebounds to sell.
How to Use Fibonacci Retracement
TradeStation users can access Fib retracements on our desktop, web and mobile platforms.
- Click on “Drawing” (marked with a pen icon) to start.
- On the desktop, select “Fibonacci Price Retracement Lines.”
- On the mobile app, tap the pen icon and select the Fibonacci tool. Its icon shows a diagonal line running through a series of horizontal lines.
- On web trading, click the pen icon on the left and select “Fib Retracement.”
After activating the Fibonacci tool :
- Left-click on the starting price level. Release the button.
- Move the cursor to the ending price level.
- Left-click again. This will establish the range.
- You can drag the prices to adjust the top and bottom of the range.
Adjusting The Fibonacci Tool
You can adjust the drawing by right clicking on a line and selecting “Edit ‘Fibonacci Retracement Lines.'”
A dialog box will appear. You can easily make some of the following changes:
- Change the colors of the various retracement levels.
- Change the style of the lines (solid, dotted, dashed, etc.)
- Change the line weight (thickness) or transparency of Fib retracement lines.
- Hide lines using the check boxes to the left. (In case your chart is cluttered.)
- Tabs on the left also let you set alerts and change the fonts of the labels.
Uptrend Fibonacci Retracement
When stocks are trending higher, it’s not always clear where support and resistance might be. How much of a pullback should you expect?
While no indicator is always accurate, Fibonacci trading provides starting points. Simply adding retracement lines to a price chart can help find where buyers may step in.
Take Boeing (BA) for example. The aerospace company languished near its 52-week low in early November amid pessimism about its turnaround. Then management unexpectedly said free cash flow would reach as high as $2 billion — roughly triple the amount forecast by Wall Street. Buyers immediately jumped in, lifting the stock 25 percent in barely a week. Given the pessimism before the news, traders weren’t sitting on big profits so none of them were quick to sell. The result was a very tight uptrend with few clear entry points.
However, the Fibonacci tool plotted a 23.6 percent retracement at $168.57. BA tested just $0.05 below that point before stabilizing and continuing another 20 percent higher. (See the chart above.)
Fib trading could have also applied to the S&P 500’s move since October. See this chart on our TradingView channel, which shows how the index had two 50 percent retracements as it rebounded from a two-year low.
In conclusion, Fibonacci retracements can be a useful tool for active traders in the stock market. Hopefully this article helps get you started with this technical analysis tool.