Technical Indicators

Individuals have used the technical indicator called Fibonacci ratios to study examine previous price movements of stocks on the stock market, and have found that they are inclined to go up and down based on these ratios. The three most regularly used ratios are 23.6%, 38.2%, and 61.8%, but there are others that come into play as well. These three common ratios are derived by dividing a number in a Fibonacci sequence by the number to its right, or two places to the right, or three. And needless to say the numbers in the Fibonacci sequence itself originate from starting with zero and one, and then making the next number always be the sum of these two numbers before it.

Using Fibonacci ratios to study previous times movements of stocks is all well and good, but you might be questioning if they can likewise be employed to predict the future price movements of those stocks too. As it turns out, this can indeed by done to some degree, using what are called Fibonacci arcs. It is these that are created by taking the high and low point of the stock, the peak and trough on its chart, over a specific period of time. Then a diagonal line is drawn to join them, and four ratio points are marked along that line: 38.2%, 50%, 61.8%, and 100%.

You can draw arcs around the center, If you take the lower point as the center, you can draw arcs around it at those ratio points. And what youll be inclined to believe is the line tracing the stocks progress continues to move along the chart, up and down, is that those ups and downs will are inclined to come at certain later points along the arc. So if you had high in late December that you are counting as 100%, and a low point sometime in late February that is presented with the 0% mark, you might see that the stock sat at the 61.8% arc in mid-January. Follow the curvature of that arc around until it intersects the late March point of the chart, and you notice that the stock rose back up to meet that 61.8% level then, before reversing downward.

This does not mean that it was inevitable that the stock returned to that higher point. There was also an arc for the 38.2% level that curved over that point in late March, in addition to along with the 100% arc. It might have climbed much higher, or sunk much lower. What good are these arcs, then, if they do not really inform you where a stock is likely to be in the future at some point sooner or later?

As a matter of fact, its not entirely true that they do not predict this. That is, they predict probabilities if a stock is moving in one direction or another, although they cant necessarily inform you which direction that is likely to be. Yet they can also help guess the direction too, depending how strongly the stocks progress approaches any particular arc. If it breaks through that arc, it is much more probable to get close to the next arc level before reversing. If it doesnt quite reach that next arc or touches it only slightly, its much most likely to fall back toward the lower arc, as opposed to break through and head for the next higher one.

Overlaying these Fibonacci arcs on top of the chart that follows the fall and rise of a stock will not predict the future|tomorrow with an ironclad guarantee. But this procedure can certainly present you with some clues about the direction the stock may go next, and what level its likely to reach. And this consequently is in a position to help you make some better informed choices.

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