Understanding and Trading Fibonacci Lines on a Chart | Technically Speaking: Advanced Charting
[Music] [Music] good afternoon and welcome everyone my name is cameron may filling in for pat malawi today it's two o'clock eastern standard time on a friday afternoon and that means that it's time for technically speaking advanced uh charting techniques and today we're gonna be talking about uh one of probably the most popular tools in the in the drawing tools tool set or toolbox for a technical trader and that is fibonaccis so i'd be interested to know i know a lot of you from some of my other webcasts i see those in attendance already who are chatting in i know that some of you are familiar with this tool go ahead chat and let me know if you've used fibonacci's you know maybe your paper money a real account doesn't matter which but this is one of those tools that might help an investor address a scenario where maybe they're excited by a stock move that's taken the price up to new territory it's never been before and it's not obvious where support and resistance levels might be so i'm looking forward to this discussion we'll set a more precise agenda in just a moment but before we dive into that let me just say hello to all of you who are already chatting in hello there vijay wayne sarah ganesh krishna bill grace tony remy heartman85 mike tm brad fayez charles monique well the list goes on on chris b and dylan and everyone else thanks for being here to support us week after week thanks for being here to learn we definitely appreciate your attendance and your contributions if you are here in this webcast the very first time welcome i think you're going to enjoy the presentation and if you're watching on the youtube archive after the fact enjoy the show but of course you're invited to join the live webcast typically will be hosted by pat molly but hosted every week two o'clock eastern standard time on fridays and a final note we do have brent morris joining us hello brent great to have brent on board his role is just going to be to help us out with any chat questions that i can't get to during the presentation he has a fantastic resource in this in this arena of technical analysis and uh and other skills related to the markets so uh thanks brent for uh for lending your time to us today so let's get right into it we're going to start things off as i always do and that is with the discussion of risk but i do want to offer an invitation first if you're not following me on twitter my handle at cma underscore tda i like that i like that personal uh connection that can be made through that platform it's not always possible through a webcast and brent can be followed at b moore's m o o r s underscore tda all right so let's talk about risk for just a moment we're not going to be really discussing options today however we do should note that options are not suitable for all investors any investment decision you make in your self-directed account is solely your responsibility transaction costs are important factors should be considered when evaluating any trade while this webcast discusses technical analysis other approaches including fundamental analysis may assert very different views and all investing involves risks including the risk of loss all right so let's let's set the stage for what we're going to discuss so the very first thing that i want to do for the benefit of those who haven't used this tool before i want to take a good dive into how this tool known as a fibonacci retracement is constructed what's its background what is it on a chart then we're going to apply it to a series of charts finally we're going to talk through a series of potential trade scenarios so uh what what we're looking to accomplish by the end of today's discussion is not only to have an understanding of what fibonaccis are but also how they might be applied to a trader's chart to help that trader make uh in investing destroy the decision regarding when to get in and when to get out of trades all right there we go so let's go right to the platform and the thing that got me thinking about this is really the way that the the s p sort of stair steps upward as it tends to because it's going upward it doesn't tend to go straight up instead it goes in little cycles or little steps and if and as the s p goes down it doesn't tend to go straight down instead it'll tend to go down little cycles it's not always a guarantee that this is how it always works however this has been um it's been a pattern that's been observed for over a hundred years really first identified by a gentleman named charles dao but in the in the hundred or so years since then we've seen this pattern repeat over and over again for indices for individual stocks and that pattern um might be broken down a little bit in a little bit more detail using this tool that i want to discuss so the very first thing that we're going to do and there's tony just up the road in south jordan utah tony knows that i'm just down the road i'm probably what uh 15 miles south of utonia maybe 10 10 15 in saratoga springs yeah so let's talk about this tool the very first thing i wanted to do is let's put it on the chart so we can have it there as a visual point of reference and then we'll talk about how it's constructed and then we're going to use it number of different repetitions with this okay so the very first thing we need is it's to access this tool and it can it's it's one of our drawing tools so we can find it up here under the drawings menu we could pop up here and go to drawing tools i think a quick way to access the drawing tools is just come down to your active drawing tool icon down in the lower right hand corner right now i do have fibonacci retracements already selected but for example if i were on my on my trend line tool i come down to that icon click on it i get this menu and i'm going to choose the one that looks like a big percentage icon so i'm going to click on that and now i have the fibonacci tool activated and i'm going to draw a fibonacci on this chart if you haven't used this before that's okay i'll explain how it's done but uh but initially i just want to make the point that it's drawn using the same process as drawing pretty much anything else if we want to draw a line we click once where we want to start the line we quickly get click again where we want to end the line we want to draw let's say an oval we click once where we want to start the the oval and we click again where we go out and want to end the oval so i'm going to come back here what are we on maybe a about a seven month chart here of the s p 500 and when using fibonaccis uh investors very commonly will look at that they'll look for an acceleration in one direction or the other of an established trend and particularly at times when support and resistance are a little bit obscure all right so to paint that picture for you actually i'm going to hit the pause button on drawing my fibonacci for just a moment but let's let's just do a quick revisit of history i'm going to change my time frame on this chart let's go out to like a 20-year chart we're going to change this to maybe a weekly chart just to make it a little bit less messy and then click ok so here's the 20 year history of the s p 500 the point i wanted to make is we are up here maybe we call this no man's land right we're in areas where we've never been before so using some of the traditional approaches to identifying support and resistance might start to falter for example it's very common when when looking for a price ceiling to look have we been at a price level like this before well when we're at all-time highs that's not the case we don't have that luxury of just saying well okay uh maybe we'll maybe we'll go back up to where we've been before nope we're above every yellow every area or at least throughout this year we've encountered this scenario over and over again where we're above all available resistance levels all available available historical hit resistance levels so it's under these sorts of circumstances where this tool might be uh used pretty commonly right there are other circumstances but that's probably the one that we're going to focus on today so now let's switch this back let's go back to our time frame i'll just go to a one year one day chart and uh let's get back to where we were about these last seven months all right so oh and thank you i just got a nice compliment mr hrh 747. i appreciate that i really try to make these concepts it can be complicated uh more digestible i know that it can it can be a little bit difficult if i get too wrapped up and trade or speak or whatever so i try to go to a pace that everybody can follow all right but what caught my eye in this upward sloping persistent bullish s p market the stock market is that you know about seven months ago we had this acceleration and you can envision seven months ago these were again the highest points we'd ever been on the s p 500 so under these circumstances a trader might come and use their fibonacci tool i'm going to go right to the top of that up move and the order in which i make these clicks is important remember i said you click once to start click once to end well in an upward move we click at the top to start drawing and then we go down the bottom of that move and click again at the at the very bottom click again to end the drawing okay there we go so i've just positioned that that fibonacci so that for now is going to serve our purposes it's going to be our visual reference point while we talk about where did all these lines come from what are these numbers right so i'm going to use my left column here for a moment and let's break down these things called fibonaccis that's a bit of a mouthful fibonacci as well these fibonacci lines and these fibula fibonacci numbers relate to something that's that's drawn from from mathematics don't worry it's not terribly complicated i think we'll all follow with this um it's called the fibonacci sequence and this is a sequence i i need to do a little bit more research i've got to refresh my memory i knew at one point exactly or at least conceptually theoretically where this sequence originated but for for let's just say hundreds of years this sequence has been observed by mathematicians and that is they noticed or it starts with this sequence of numbers begins with the number zero all right and then we just move to one and then we take those two numbers we add them together zero plus one is what well it's one and now we move one position over to the right we add these last two numbers so one plus one now gives us a two and then one plus two is three and two plus three is five and we just carry that sequence out just keep going okay so i'm gonna i'm gonna generate some of these in this fibonacci sequence pretty quickly if somebody catches me making an error in my math it's possible but anyway i think i got them all right there anyway i'll add the little three dots to indicate that this does carry on out add infant item it just keeps going right so there is our fibonacci sequence so you saw how that's generated and then the interplay of the numbers here also generate some other interesting things and specifically the ratios of the numbers for example in mathematics and even this is bled over into other uh other science fields such as biology but there's something known as the golden ratio okay and the golden ratio is we just take any number in the sequence so for example 89 and divide it by the one just before okay so if we were to come up here and get our calculator we take 89 do we divide that by 55 we get this number 1.618 okay so we take the number take any number in the sequence divide it by the one before not 59 but 55 and we get 1.618 and that is consistent it's always 1.618 now it's not very accurate with these smaller numbers you know 3 divided by 2 for example not a very precise couple of numbers so we get something that approximates 1.618
but as we start to get into the bigger numbers they start to settle in solidly at 1.618 and then we just get more decimal points off to the right get rid of that extra 5. anyway in any case that's that's known as the golden ratio because when we start to when we start to apply that mathematically to uh to interestingly what what would seem to be unrelated concepts we start to see this number has strong application for example if we look at the arrangement of seeds in a sunflower seed apartment in a sunfl in a sunflower if i were to give you a you give you an assignment we know the sunflower the the center portion what do we call that i don't know the middle of the flower it's a it's a circle and if our task were to arrange as many or fit as many seeds into that circle as we can what we might discover through a laborious process of elimination is boy if you if you were to arrange the seeds in two interlocking spirals that um that's the best way to fit in as many seeds as you can so it's not to make rose or you know put in expanding circles or anything like that it's actually to spiral them one against the other and actually that can be described that arrangement can be described mathematically with this ratio and we see this ratio in other areas of nature so for example the arrangement of the chambers in a nautilus shell a nautilus shell is that weird little squid snail looking creature that sort of jets itself through the water you know what i'm talking about sometimes you'll see you know fossilized nautiluses are not what we call nautiloids i don't know in any case if we you see them sometimes the bookend where they've been sliced and you can see these these uh spiraling chambers growing larger and larger well the size of those chamber chambers increases pardon me as that animal is growing within its shell and they grow it at approximately a golden ratio rate of growth so this is all interesting for math and for nature but what some traders have done is they wonder to themselves are there certain behaviors in the proportions of price activity that might mimic what we're seeing in mathematics or in biology and in in some circumstances it seems that there can be all right so we'll look at that as an example so that actually will show up as one of our fibonacci lines do you see that right there 161.8 that's just moving the decimal point on this so where do these other lines are these other numbers come from well they're just other ratios so for example instead of taking one number in the sequence and divide it by the one just before we might take a number of the c sequence and divide it by the one just after so for example 55 divided by 89. it's just the reverse of what we've already done well i even screwed up that i just noticed let's get that corrected there we go in any case 55 divided by 89 gives us what point six one and with a little bit of rounding eight and as we look at our fibonacci tool there we go 61.8
now all that we need to do to generate these other numbers is we take a slightly different arrangement of the numbers in this sequence so we generated this number by taking one number and dividing it by their the number just to the right of it in position what if we take a number and divide it by two numbers to the right so for example let's take 34 and divide it by 89. that gives us 0.382 and what do we see oh it's kind of obscured there by my candles but you might have to take my word for it pardon me it's 38.2 0.382 all right and we can just take that one step further 21 divide that by 89 and i'm just using those as representative that works really as and particularly as we get with the bigger numbers the the precision tends to grow but 0.23 and with a little bit of rounding six so if you've ever if even if you've been using this fibonacci sequence and you think all right well that's cool i know how to use it but i don't know how it's constructed now you're seeing where these numbers are coming from now we have a few other numbers to address here where does the 100 and the 0 come from well 0 is a fibonacci number and 1 is a fibonacci number so really we have 0 and one with these other ratios in between and then finally the only oddball out here is the 50 percent that's not actually a true fibonacci ratio fibonacci ratio number however for some traders it's just a mathematical expression of the assumption that if a stock goes up it's very likely there's going to be some profits taken and and is there is there any proportionality to how far down this the stock might go as profits are taken and for some traders including charles dow way back in the day they noted you know what 50 percent seems to be about a common number so that's been added to the this fibonacci sequence so overall there we go that's how we come up with these numbers so now that we know how it's constructed let's see if it has any any potential for application for a trader all right now you'll notice when i drew from top to bottom here i got this whole series of lines and lines should be familiar to a technician horizontal lines are very commonly used as areas of support and resistance and that's what we're looking for we're looking for this tool to inform us regarding where support and resistance areas might be and in particular after a strong move up in the direction of established trend we already know the s p in this in this case was going up it has been for a decade we got an acceleration here in march if the profit taking starts how far down might this might the uh might a stock or an index go as those profits are being taken that's the first question so let's use the first potential application here i'm going to be using about three or four potential applications for fibonaccis there are lots of other ways that this tool might be used but one thing that you'll see me commonly demonstrate when we're planning a trade or whatever is that when we get an explosive move to the upside on an index or a stock and the selling starts to gauge how far that selling might carry us downward we'll set up an expectation this isn't my original expectation it's just a typical application of fibonaccis but we'll set up an expectation that the profit taking might carry us down about one-third to one half of the distance that was traveled on the way up so in this case we went from here down here at these lows represented by the zero line up to here up to the highs represented by the 100 line if we give back about a third to about a half it's going to take us right down between around the 61.8 to the 50 retracement level so it's interesting here as we look at the s p where did it pull back you can see there was one day a few hours of trading took us right down in this case it was right spot on that 50 percent retracement line it's not always a guarantee that that's exactly how it's going to work however in this case it did all right so for some traders when they see this getting down into that range they may interpret that to be as a signal boy it might be getting to be about time for a new bullish entry or if they're using the s p to make maybe broader decisions for the administration of a portfolio maybe this is just a signal might be time to go be looking for some individual stock positions and maybe applied some fibonaccis to those but in any case um it's uh it's it can be interpreted to be a potential reversal point all right that's one potential use the next use so using it as support one use using it as resistance levels or target zones is another so for some short-term traders what they'll do is they'll say all right so after i get that fifty percent retracement maybe all i need is a quick return to the 100 level and maybe i'll just take some profits off right away right that's very short term but that is one one thing that's sometimes done for others though they'll look for what's called a fibonacci extension you'll notice here's that 161.8 line
all that this has really done is it has assumed a retracement to the 61.8 level and then it's tacked on this distance right here to that level so in other words retracement right down to here in our example it would be right down to about 38.83 and then projecting a target or an upswing up to about 4146 but this had been this would have been kind of interesting at the time because was there anything on the s p at any time in history to indicate that there may be a target up here if we're just looking at a traditional chart application nope we've never been there before not once ever so that's where this might be adding some value at least in theory it's not a guarantee that we're gonna hit those targets and in this case though you can see the s p moved up very nicely right up into that range and then it started to get a little bit choppy chopped around and then started pulling back all right so that's interesting now sometimes this signal fails though it's possible that a trader might see this we pull down into this this 50 to 61 range um so how might how might we look to um adapt for that well one one adaptation is that a traitor instead of just waiting and the moment we get down between 61.8 and 50 maybe they wait at least for the appearance of a of a bullish candle so here we did get a nice bullish candle right there after it entered that 61.8 or 50. but in any case sometimes it fails completely and the stock or the index continues lower and in that case some investors will look at the 38.2
as kind of a stop area kind of a signal to all right this one's not working out there are more profits being taken than than we anticipated and maybe whatever it was that got the markets or the stock stock traders excited in the first place maybe so much of so much that meantime is bled out of this that it's no longer an attractive trade scenario okay so somebody just asked a very good question uh yeah question why do you draw the retracement starting at the high level to the lower instead of doing the opposite it's a very good question here's the answer okay let's draw our next one i'm going to right click on this let's just clear the whole drawing set and let's say all right so we're advancing again we're getting another run up it's taking us up into no man's land again and we're trying to project where the support and resist resistance level is likely to be well we could you know i've i've shown you draw from the top down what if we draw from the bottom up as i click on that oh i don't want to draw another box let's get rid of that one let's remove that drawing switch our drawing tool back to a fibonacci if i draw from the bottom up here's the problem watch what happens with the extensions so i'm going to click at the bottom and start to move up uh oh i'm not getting my targets in the right place do you see that my 161.8 and my 261.8 and so on are down below that could be very useful if we were using this for bearish trades and we needed to project to the downside but we're not we're doing bullish trades we need to project to the upside at least for this example okay so that's that's why okay so let me just remove that drawing and let's redraw it so now i'm going to draw from the top down and let's just see what the s p did so here we had another strong move to the upside profit started to be taken if we were to use that 50 retracement that pardon me 61.8 to 50. did we get it yep we got it we got right down into that range this was a bearish um candle it turns out it you know buying at that bottom would have been fantastic it's tough to do that though so if a trader were waiting for bullishness they might have seen a white candle they might have waited i don't know maybe for that hammer but i think quite likely we see this inside day that's uh it's known as a bullish harami another confirmation right there did it pan out right away nope guess what we pulled down again but we're still down in that in that reversal range and then we take off so if a trader is looking for a return to the 100 percent there's target number one the next one though took a little while notice it took us out here to august we eventually got up there interestingly though once we got up to that 161.8
there's some hesita there's a little bit of hesitation there in price right so i think you're seeing how this might be done let's do it some let's uh let's just get some repetition with this now so let's clear the drawing set here's another run up there's another nice run right there so we might be able to measure right from the top and again i'm drawing a box i'm not going to use the boxes anymore because i'll forget again let's remove that drawing and let's draw our fibonacci right from the top and notice i am using the extremes of the candles there is some debate there sometimes traders will just go to the top of the body down to a bottom of a body others will use the wicks my tendency when i'm drawing is to use the wicks or the the shadows on the on the candles but that's going to be a little bit of trader preference there we go and after this advance where did we pull back there's that 61.8 it's kind of a smaller we couldn't quite fit the 50 in there but you know that's what it what that is there we got that touch and then the s p ran up interestingly where did it run into resistance and then we came back down and we're using that old fibonacci uh resistance area as a new support area and we took off again all right i think you're getting the point there um let's see jack says uh isn't summer historically slow is that meant for me jack it typically is yeah it's not always the case though now vj says cameron in the case of a gap up where would you draw the fibs yeah that's a good question yeah maybe we will look at an example of that all right anyway yeah you can get some practice with this on your own just in up trends we might practice drawing from support to resistance here's an example of where we came down we went a little bit beyond that 50 percent retracement area so had we purchased on the red candle we might have been uh oh now we're stopped out maybe if we're waiting for that white candle maybe we're okay all right but here it's interesting where did we project a potential resistance next right up there all right so some good examples of how these fibonaccis might be used it's never a guarantee that things are going to work out perfectly and in this case you know somebody might have been anticipating here's a nice run up maybe and actually let's go ahead and throw a fib on this one and let's zoom in a little bit okay here we pull back and we start blasting down through do we get that bullish candle here not really not really here we get one that might have turned into a whip saw event and then we break down and through we're down below uh the sort of the point of no return and boy the s p has really reversed at least from that fibonacci perspective so what could we do now going back to that question here by uh m roman d one well here we might start using the fibonaccis in the other direction and this is kind of interesting here's a run down strong run down now as we run down they're actually you know a trader might look they do have some historical context if they just want to use more traditional means for identifying support and resistance but if we were to draw our fib from the bottom of this candle up to the top of that one this might actually make things a little bit encouraging for those who are thinking uh oh is this a significant bearish reversal on the s p well if it were significant from a from a fibonacci perspective we wouldn't really expect a break through the 50 percent we should we should have probably turned below that and we've actually pushed up and through that and continued bullishly and we're sort of starting to push into the sort of point of no return and again that's it can certainly return from that point if it wants to that's just a label that's sometimes applied to that 38.2 all right but uh very cool so so we have a look at maybe some gap examples because yes there are some times where there's some discretion that has to be applied here and i think i hope that what you may have noticed is could i have possibly started at different start points and ended at different endpoints sometimes it's comparatively obvious other times it's not going to be so obvious so yeah let's go look at some examples here nike all right yeah so here's a strong gap to the upside let me get rid of some of these drawings that i already have here just so that we're not too distracted by that we had the we had nike moving sideways a big gap up so where do we draw our fibonaccis for some what they'll do is they'll say i'm going to draw from the top of an upside move and actually might even zoom in here a little bit let's get a little bit closer look draw from up the top of an upside move and start my fibonaccis from there so we could start right here and draw right down to the top of the upside move that's interesting look at this where did we go we ran up we pulled back 50 percent almost on the nose and then we started to advance getting to the 100 retracement took about two or three days we pushed up and through that acted as a that act as a new support and then we continued higher and we've started to hit some area of consolidation here stock got a little bit higher but it's really struggled now there's a different way that this might be done let me let me erase that one there we go and let's zoom back out for some investors though they're looking at a broader picture they want to look at this whole move here and so they might draw from this extreme peak all the way down to this extreme low and that also paints kind of an interesting picture look at this we got up here this this represents the whole move from june 18th up to august 6th that's that's a big move including that gap how much um profit was surrendered well we've come right down yeah today's candle is um it's a little bit below that 50 but right at that level so for some investors they may take that as enough of a sign boy if i can get a little bit of bullishness here they might even be bold enough for an entry so is there discretion that can be applied to a chart yep there certainly is okay all right now finally let's look at uh maybe one other example i think we just had a suggestion uh chatted in here so this is not i i drew these some time ago it's not pertinent to today's discussion so we'll just clear this drawing set but one thing that i might note with this one with amazon is this one actually is presenting lots of potential areas where we might draw our own traditional levels of support and resistance right fibonaccis might still be applied but it might be get a little it might get a little bit muddy here so that's my that's my first impression all right um how might we draw some fibonaccis recently well here's a strong move to the upside so we might go to the top of that up move go to the bottom of that down move and see are we settling in yeah we've come down to that 50 percent range but boy we've we've even gotten down below 30 38.2 in this case it might not be acting as a terribly serviceable fibonacci that's okay sometimes it doesn't and so the trader just moves on right it is interesting though if we do get back up above here look at where that 161.8 is it's right right about exactly
near those previous peaks so a couple of different pieces of technical evidence coming together right so i think what you might want to do if this is your first time using fibonaccis i think it'd be interesting go out there and see if you can find a stock that has pushed up into new territory recently somewhere where we've never been before we can't go recruit historical levels of resistance or something like that and then draw your own fibonaccis on these and you might just go over here to your to your watch list could be s p 500 could be something else and just scroll down through quickly and find something that's up there in that territory where it's never been before i noticed that the alphabet is up there where it hasn't been before a lot of these are presenting their own levels of where you might be able to find your own support and resistance using kind of traditional methods but work your way through and get some repetition with this um i think it'll be that's where the the real learning happens when you're introduced to a new tool but as for right now we've accomplished everything that we set out to do today what i wanted to provide for you is a breakdown of how the fibonaccis are constructed first of all so you understand you know where are the lines uh coming from what's sort of the mathematical and and really the psychological theory underlying the uh underlining underlying the tool and then i wanted to go through a series of charts talk about how we might apply this tool and then how we might plan trades how do we know where we might take profits how do we know where we might need to cut some losses and i think we've accomplished that so time for me to to uh set you all loose i do hope you enjoyed that discussion it was definitely my pleasure to be filling in for pat today everybody as i let you go i want to thank um brent here for for providing support we had 140 150 people watching so i know that can generate a lot of questions i can't get to them all and still have a good focus discussion so thanks brent for helping out but as you go remember that risks are real we did use real examples in today's discussion not a recommendation or endorsement of that security or that strategy all right and uh now i'm just going to give you an invitation do follow me and brent on twitter at cma underscore tda is my twitter handle at b moore's underscore tda is brent and also you can you can join me in my other regularly scheduled webcast today was a fill-in but i have a regular webcast monday tuesday wednesday thursday on a range of topics including technical analysis so go check me out on the calendar and time for me to let you go we have a few more webcasts coming up then it's time to go enjoy your weekend so i will see you all on monday for my discussion of getting started with technical analysis or maybe tuesday for generating an income in your portfolio or wednesday or thursday for options but hey whenever it is i happen to see you again until that moment arrives i want to wish you the very best of luck happy investing bye [Music] you
2021-09-27 18:00
