StockTrader.com

Investing Online Made Easy

  • Getting Started
  • Market Recaps
  • Education
  • Online Brokers
  • ETFs
  • Trade Journal

Posted by Sean Hannon | Last modified on Apr 26th, 2011 | Published May 26th, 2009

3 Important Uses of Fibonacci Numbers

An example of the power of math can be found in Fibonacci numbers. Fibonacci numbers are a sequence discovered by Italian mathematician Leonardo Fibonacci in the 13th century. The sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and 89 on to infinity. The sequence has a series of interesting properties. The sum of any two consecutive numbers equals the next highest number. After the first four numbers, the ratio of any number to its next highest number approaches 0.618. The ratio of alternate numbers approach .382. These ratios are often simplified to the key Fibonacci levels—38%, 50%, and 62%.

While many of the features of Fibonacci sequences appear throughout nature, investors have harnessed their power to predict stock prices. The most popular Fibonacci-based investment system is Elliot wave theory. Given the subjective nature of the various waves and the complexity of the process, I have never used Elliot Wave in my investments. Instead, I use the following three simple applications of Fibonacci retracement levels:

  1. Levels of support and resistance – A weakness of retracements is they can only be measured by looking backward. However, these reviews offer impressive patterns. Reviewing Apple’s (AAPL) decline from a peak of $202 to a low of $79.60, we see support after 62% of the decline (red arrows) that led the price higher. Also, we see a gap through the same support (red circle) that led to the ultimate low. Applying Fibonacci levels at these events would have revealed a downside price target.
  2. Trend changes – Prices often consolidate near retracement levels. Regardless of a trend’s potential, approaching retracements will slow the pace.
  3. Price targets – The most applicable use of Fibonacci levels are price targets. When AAPL bottomed at $79.60 and began rallying, the 38% retracement level of $126 was an obvious price target. When the shares reached the price in a quick fashion, no one should have been surprised.

appl-fibonacciClick to Enlarge

Fibonacci levels are both mystic and useful. Learn to use them and take the mystery out of this technical pattern.

Sean Hannon, CFA, CFP is a professional fund manager.

Further Education, Technical Analysis:

  • Critical Support and Resistance Rules
  • 5 Key Guidelines for Trading Stock Chart Channels
  • How to Interpret Stock Chart Reversals
  • Breaking Down Stock Chart Types
  • 5 Great Chart Patterns to Watch for
  • How to Read Stock Charts
  • Top 5 best Free Stock Chart Websites
  • Stock Chart Education Test (Answers)

Join Over 22,000 Investors

Receive Weekly Market Recaps directly in your email inbox!

Log, Store, and Analyze Your Trades

Whether you're a new or seasoned investor, the StockTrader.com Trade Journal helps you trade better:
  • Step 1 - Add trades
  • Step 2 - Mark strategies and mistakes
  • Step 3 - Analyze your results
  • Step 4 - Improve your trading
Get Started Now

Stock Market Recaps

Join over 22,000 investors and sign up today for our free weekly newsletter.

Most Popular

  • 20 Must Read Investing Books
  • 10 Trading Secrets I Wish I Knew When I Got Started
  • How to Retire With At Least $1 Million Dollars
  • 10 Great Ways to Learn Stock Trading
  • How I Trade (2018 Edition)
  • 5 Best Free Stock Chart Websites
  • Compare Stock Brokers
  • 60 Stock Tips for Investment Success
  • 5 Best Free Stock Scanners
  • List of 2x 3x Long ETFs
  • Learn Technical Analysis
  • Stock Chart Basics
  • Top 10 Finance iPhone Apps
  • Stock Risk Calculator
  • Product Reviews

Latest Market Recaps

  • Weekly Market Recap Apr 22, 2018
  • Weekly Market Recap Apr 15, 2018
  • Weekly Market Recap Apr 8, 2018
  • linkedin
  • twitter
  • facebook
  • rss
  • About
  • Contact
  • Terms of Use
  • Disclosures
  • Privacy Policy
Disclaimer: Please note that StockTrader.com does have financial relationships with some of the services mentioned here. In some cases, StockTrader.com may be compensated if visitors choose to utilize the links located throughout the content on the site.
Back to Top

©2018 Reink Media Group LLC · All Rights Reserved