Identifying key swing points. Highs and lows.
Before we can even think about calculating Fibonacci price support and resistance levels, we must learn to identify key swing points. Swing points are low or high points on a chart where price reverses direction. These are the key points used to calculate Fibonacci price levels. Rather than getting into a highly technical discussion of swing points, its better to provide general guidelines to be followed in choosing these swing levels.
A swing high occurs when the current high has a lower high before and after it.
A swing low occurs when the current low has a higher low before and after it.
Question: What if there are multiple lows (or highs) relatively close to the same price due to a price consolidation range? Do I use all of them to calculate Fibonacci levels?
Answer: No. For swing lows, if the lows are restively close in price, use the low furthest to the right in the consolidation area. For swing highs, if the highs are relatively close in price, use the high furthest to the right in the consolidation area.
Question: When is a swing point not valid to use?
Answer: When calculating support, a swing low is not valid when there is a lower swing low to the right of it. When calculating resistance, a swing high is not valid when there is a higher swing high to the right of it.
Creating Fibonacci levels
Let's look at a few charts to get a feel for what to look for.
In the case of this chart, we are in an uptrend and the stock has just started to make a move to the downside (A) over the last three days. Tt will be my goal to calculate a price support zone with enough strength to stop the price action from going down and reverse it back up to continue the trend that has been in place. To do this 1 need to identify a swing high (A) and multiple swing low points (B), Please note that when we are calculating support levels there is only one swing high and multiple swing lows. This is the exact opposite for finding resistance in a downtrend (one swing low and multiple swing high points). It is the consolidation areas where swing points are most difficult to determine. Just apply the general rules.
Below is a stock in a downtrend. Once a swing low (A) is made in a downtrending stock, I look for swing high points (B) to use along with the current swing low (A). These are the swings to be used to calculate Fibonacci price resistance. In (1) and (2) below, you may ask why I wouldn't use both at those swing points. This was a situation where the swing high points were close in price, so I used the one furthest to the right on the chart.
Calculating Fibonacci levels Q&A
Question: How many swing points do you use to calculate Fibonacci levels?
Answer: I'll go back as many as eight consecutive swing points. Beyond that it would be wise to shift to a higher time frame chart to analyze support and resistance. So, if you are studying a 30-minute chart and have gone back eight swing points, I suggest if you want to go back any further, shift to a daily chart.
Question: Are certain swing points more significant than others?
Answer: If a trend is in progress, I believe there are four swing points that carry the most weight. The first (A) is the swing point that was just made. Second (B) is the swing point made immediately before reversing into the trend that is in place. The third and fourth (C, D) are the last two swing points made in the direction of the trend before forming swing point A.
Rule of Thumb: Step back and look at the whole chart in a general way. The significant swing points WILL stand out. ft's not rocket science and should not be a stumbling block to learning to calculate Fibonacci price levels. The more you do this analysis the quicker you will be at picking up the swing points and calculating the price levels.
