FibZone is a relatively tight range of price where a confluence of any combination of at least three Fibonacci price retracements, extensions, projections, or expansions occur.

If a FibZone occurs above the current price, it is resistance, and if a FibZone is below the current price, it is support. What is called here a FibZone, others call „confluence“, „price zones“, „clusters,“ etc.

When trying to determine high probability reversal levels using Fibzones, you'll have to follow these steps:

1. Identify key highs and lows on the chart.
2. Calculate RETRACEMENT levels using swing low points identified in this uptrend and the current swing high point
3. Calculate EXTENSION levels using swing low points that are higher than current price up to the current swing high.
4. Calculate PROJECTION levels by measuring previous declines (in an uptrend) and subtract the size of those declines from the current high point. Opposite for downtrends.

Does the size of the FibZone matter?

To qualify as a zone, it needs at least three Fibonacci price levels. Yes, as the number of price levels that occur in a FibZone increase, the more important that FibZone becomes. It's like ripping one piece of paper in half or trying to rip a phone book in half. One page is no problem. But as each additional page is added to the stack, it becomes more difficult to tear them in half.

What Fibonacci ratio is the most important in a FibZone?

Some strategies have specific ratios that must be present. These are specific types of FibZones. Generally speaking, though, I am not looking for a specific ratio. I just want to see a confluence of Fibonacci price levels (I don't care which ones) in a relatively tight range.

Which Fibonacci studies are better?

There are four basic Fibonacci studies: Retracements, Extensions, Projections, and Expansions. No study is necessarily better than another. Continue to go back to the focus of the FibZone. A tight price area with a large number of price levels represents a trading opportunity.

After running the Fibonacci studies on a chart, do you remove any of the Fibonacci levels from the chart?

Yes. If a price level is hanging out all by itself on the chart with no other Fibonacci levels around it to create a FibZone, then you will delete that price level. Simply look for groups of Fibonacci ratios concentrated in a small price range.

How big can a FibZone be?

Depending on the chart, a FibZone can be very wide. However, for trading purposes, you should try to find charts that provide FibZones that are no more than 10% of the price of the security from the low price to the high price of the zone. Many times the zone is closer to 5% in the width of the price of the stock or commodity. For example, you wouldn't want a FibZone on a $40 stock to be much more than 4 points deep.

Sometimes there is more than one zone after running these studies. So, how do you decide which one to trade against?

FibZones simply provide decision points in a particular market. A decision point, that's it. Fibonacci, by definition, is a tool that assists the trader in finding support and resistance levels. So, the key to knowing what zone to trade against will be based on what you use for a „trigger“. After those decision zones are on the chart, it is necessary to have certain patterns, indicators, oscillators, etc., that you will use to determine the internals of the market you are looking at and when to actually take a trade.

What software programs do you recommend using to calculate these FibZones?

There seems to be a new software program coming out every day to address Fibonacci. You may use Dynamic Trader, cause it's probably the most comprehensive Fibonacci tool on the market right now. Whatever program you consider, you need to be able to delete lines/price levels that you don't need, be able to do each study we mentioned earlier, and manipulate the chart with relative ease, as well as perform other technical studies, and the ability to make notes on the charts.

When is a zone recalculated?

In an uptrend, a new support zone is calculated when the current high is violated and a new high point is made. In a downtrend, a new resistance zone is calculated when the current swing low point is violated and a new lower low point is made. Remember, a high point is confirmed when a lower high is made on each side of the high, and a low point is confirmed when a higher low is made on each side.

At any one time, a Great White has more than 3000 serrated razor-sharp teeth aligned in rows. The Great White is the only shark that will poke its head out of water, possibly to get a view of its prey before attacking. They've also been known to completely jump out of water usually when racing upwards from deep water to catch a fast-moving meal. Sounds like the market, in many ways.

Whether you are looking at an intraday, daily, weekly, or monthly chart, you could have observed an interesting relationship around swing high or low points. When price is approaching the most recent swing high or low point, it faces a key decision at the .786 retracement level. If the .786 retracement is violated, then price will more often than not continue quickly to the next Fibonacci levels between the 1.272 and 1–618 extension. Although that is a critical part of the Shark Attack strategy, it is not the opportunity you should be looking at. To the untrained eye, it would suggest further downside when a low point is violated and further upside when a high point is violated. This is where the shark attacks. It comes out of the water with power, but once it „attacks“ it slides back into the water. Sliding back into the water in trading terms translates to a reversal. That slightly lower low or slightly higher high is a trap, in a sense. Yes, this description sounds a lot like double tops and bottoms. In a sense, it is. However, key points to remember that the general double top and double bottom discussion do not include are:

1. What the relationship is between the .786 and the extension levels at swing points,
2. Hitting extension levels like the 1.272 and 1.618 of previous swings represent „stretched“ price action and a tradabie Shark Attack reversal typically occurs around these extension levels.
3. The more Fibonacci extension levels that come together in a tight price range, the greater the likelihood for a tradabie reversal.

Rules For Buys (Shorts Are Reversed):

1. Swing point low A is identified.
2. Once a low point A is established, price rallies to form a high point B.
3. This is where it gets interesting. As price approaches the .786 retracement of swing A:B, a potential momentum trade is setting up. Basically, if price goes below the .786, it is likely to decline to the 1.272 to 1.618 extension of swing A:B. Many times, this move from the .786 to the extension levels happens very quickly. So this presents short-term momentum traders an opportunity. This opportunity is peanuts though, compared to the reversal potential.
4. Once price goes down to the range of the 1.272 to 1.618 Fibonacci extensions, it forms a shark-looking formation. It's like the shark is getting ready to take a bite out of any short traders at this new low level as price reverses from these extension levels and rallies significantly to the upside. Go long on a trade above the previous bar high.
5. Initial stop below the Support FibZone.
6. The first objective on this trade is the .50 to .618 retracement of swing B:C.
7. The next objective is the 1.272 extension of B:C Once this price level is hit, begin trailing a stop to the previous bar low on the rest of the position.

Shark Attack Fibonacci Trading Strategy Long Setup:

1. Low point A is made.
2. Once a low point A is established, price rallies to form a high point B.
3. Price goes below 19,20, which is the 786 retracement. This presents a short momentum trade opportunity down to the 1,272 to 1.618 extension of swing A:B. In two bars, SMH hits 17.83 for a quick potential profit of a little over 1 point.

Once price hits the 1,272 to 1.618 extension of swing A:B, we have a Shark Attack pattern in full swing. With a new low established, the shorts are in control, or they think that's the case, until the shark takes a bite out of them.

Shark Attack Fibonacci Trading Strategy Long Result:

4. A long trade is initiated at 18.45 when we get the first price bar to go above the previous day's high after hitting our Fibonacci extension levels. 5. The initial stop loss order is placed just below the 1.618 extension level around 16.80. 6. The first objective on half of the position is between the .50 and .618 retracement of the high point В to low point C. 7. The next objective is for price to hit the 1.272 extension of swing B:C. This level comes in at 22.54. As the stock makes new highs, I move the stop up to the previous bar's low. In this case, we are stopped out at 22.35.

Shark Attack Fibonacci Trading Strategy Short Setup:

1. An up trend is in place as the stock forms swing point A.
2. Once a high point A is established, price declines to form a low point B.
3. Price goes above 63.85, which is the ,786 retracement of A:B. This presents a long momentum trade opportunity. In two 15-minute bars, EBAY trades up almost .30 points without looking back. Once price hits the 1.272 to 1.618 extension of swing A:B, we have a Shark Attack pattern in full swing. With a new high established, the longs think they are in control. Unfortunately they are buying in shark-infested waters.

Shark Attack Fibonacci Trading Strategy Short Result:

4. A short trade is initiated at 64.01 when we get the first price bar to go below the previous bar's low, after hitting our Fibonacci extension levels. 5. The initial stop loss order is placed just above the 1.618 extension level around 64.50. 6. The first objective on half of the position is between the .50 and .618 retracement of the high point В to low point C. In a situation like this when using intraday charts, I will sometimes not take profits and just wait for the 1,272 extension level. 7. The 1,272 extension of swing B:C comes in at 62.98. Once price hits this level I start trailing my stop to the previous bar's high. As the stock makes new lows, I move the stop down to the previous bar's high. In this case we are not stopped out at the end of the day, so I close the position because the trade was based on a 15-minute chart. So, the short was covered around 62.50 for approximately a 2-point profit intraday.

This looks a lot like a double top/double bottom strategy. Is that what you are defining?

In theory, yes, the double tops and bottoms can make slightly higher highs or slightly lower lows. I suppose you could look at this as a specific type of double top or bottom with a specific Fibonacci target completion point for the second peak/trough between the 1.272 and 1.618 extension levels.

Could you explain exactly why you call it „shark attack“?

Let's talk in terms of a Shark Attack short setup. When you look at this pattern as it is forming, price establishes the first high point. Then it reverses in the opposite direction to the downside. This gives „hope“ to the early reversal traders looking for a nice downside move. However, when price returns to the previous high and makes a slightly higher high, then the early reversal traders typically get stopped out and are forced to buy to cover their short position. Not only do early reversal traders get stopped out, but this pulls new trend followers into the game as a new high is established. This influx of long order flow creates momentum and will typically push price to a Fibonacci extension level between 1.272 to 1.618 of swing A:B as we defined earlier in this chapter. Many times this is the „last gasp“ exhaustion move before the real change of direction occurs. When you look at a chart this price movement takes the shape of a shark head with its mouth open. Basically, the shark is „attacking.“

As a Shark Attack pattern completes, are there any specific characteristics about the FibZone that one should look for?

Multiple extension levels fall into this FibZone from various low to high or high to low swings. Specifically, multiple levels of the 1.272 and 1.618 ratios. When four or more extension levels come together, there is an extremely high probability for at least a short-term tradable reversal.

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.

Fibonacci numbers

Fibonacci numbers can be used in numebous trading strategies. However, this is important to undertand what these Fibo numbers represent and learn more about the basics of the Fibonacci numbers.

Fibonacci numbers series and its unique properties was first written about by a mathematician named Leonardo de Pisa de Fibonacci (1170–1240). The series starts like this: 1—1—2—3—5—8—13—21—34—55—89 .. , … and goes on from there. Basically, the first two numbers are added to get the next number in the series. As you can see, this series goes on forever.

Fibonacci ratios

What is fascinating about Fibonaci numbers series is the ratio that is found when a number in the series is divided by the preceding number in the string e.g., 8/5 or 55/34). This ratio, no matter where you go in the summation series, is right around 1.618. Over the years, this Fibonacci ratio, 1.618, has been mentioned in writings, essays, and speeches by some of the greatest minds in science and mathematics. Why? Because it is found in the structure of a universal assortment of phenomena in the physical world. This includes nature, architecture, geometry, music, our DNA, and most relevant to us … the financial market.

What Fibonacci ratios are used in trading?

In technical analysis this is possible to use Fibonacci to find important support and resistance levels. But what Fibonacci numbers are used in specific calculations to make these kinds of projections? What are the best Fibonacci numbers to use? Here they are:

The basic Fibonacci ratios are 1.618 and .618.

Besides these two numbers, other derivative ratios that can be used in trading are:

.382 = .618 squared. Also, the ratio between alternate numbers in the Fibonacci sequence is 2.618 or its inverse, 0.382 .500 = divide the 2nd number by the 3rd in the Fibonacci sequence.

.786 = square root of .618

1.000 = 1.618 x .618 (also used simply for symmetry measurements)

1.272 = square root of 1.618

2.618 = 1.618 squared

There are certain specific ways and trading strategies in which these ratios are used. The important point here is to know which ratios are used and how they are derived. But now at least you should have a basic understanding of the background of Fibonacci and the ratios used in trading. If you are interested in furthering your education in the history of the Golden Mean or Fibonacci, all you need is a computer and Internet connection. There are thousands of articles and materials on the subject. Have fun!

Through the use of retracement studies, we will be calculating key areas of price support and resistance.

First let's take a look at a picture of a retracement:

A retracement is simply a move in the opposite direction of the current trend. In a sense it is „recapturing“ a portion of the move that was just made. In the illustrations above,, the current trend is defined as X:A. When price reverses direction from A to B, it is „retracing“ or recapturing a portion of the move from X to A. The Fibonacci ratios I use to calculate retracement levels are:

382, .50, .618, and .786

Retracements can be used to calculate support or resistance. When the move from X to A is up and price starts to go down (as in Figure 1.1), retracements are used to calculate support for B.

Let's say X is $10 and A is $30.

First, let's calculate what the range of X to A is:

Price @ A: $30

Price @ X: $10

Range = $20.00

Next let's multiply this range by each Fibonacci ratio:

Ratio Points

0.382 $ 7.64

0.500 $ 10.00

0.618 $ 12.36

0.786 $ 15.72

Finally, take the number (points) from each ratio and subtract it from A, which is $30.00. This will provide you with Fibonacci retracement levels:

So, if I were to ask you for the .618 retracement of swing X:A, the answer would be $17.64. The price levels in the table above represent Fibonacci price support decisions. The exact same analysis can be done for Figure 1–2 to calculate retracement levels acting as resistance. In Figure 1.2, X is 30 and A is 10. This time, instead of subtracting from A, we would add to A to determine price resistance levels:

Any time a stock is in a downtrend and has just completed a significant low point, we can calculate Fibonacci retracement levels. Again, the goal is to determine how much the stock will „recapture“ of the recent move down and where it has a likelihood to reverse and go back down.

Through the use of projections studies, we will be calculating key areas of price support and resistance.

If you've already learned about retracements and extensions, its time to come to the next Fibonacci study. It is called a projection. From the figures above, projections measure the size of previous swings <X;A) in the same direction and project those swings from the current swing beginning at (B). The ratios used in this study are .618,1.00, and 1.618.

Projections can be used to calculate support or resistance. To calculate a projection three points must already be established (X, A, B). For illustration purposes, let's assume X = 40, A = 30, В = 35.

First, let's calculate what the range of X to A is:

Price ® A: $30

Price @ X: $40

Range = $10

Next let's multiply this range by each Fibonacci ratio:

Ratio Points

0.618 $ 6.18

1.000 $10.00

1.618 $16.18

Finally, take the number from each ratio and subtract it from B, which is $35.00. This will provide you with Fibonacci projection levels:

So, if I were to ask you for the 1.618 projection of swing X;A from B, the answer would be $18.82. The price levels in the table above represent Fibonacci price support decisions. The exact same analysis can be done for Figure 3.2 to calculate projection levels acting as resistance. In Figure 3.2, X is $30, A is $40, В is $35. This time instead of subtracting from point B, we would add to В to determine price resistance levels:

Above is an example of a price projection on the daily chart of Johnson & Johnson (JNJ). Swing X to A was measured for a total of 4,11 points. This range was multiplied by our Fibonacci ratios (.618, 1.00, 1.618) and each of the those numbers where then subtracted from swing В high of 64.83 to get the following projection support numbers:

.618 = 62.29

1.000 * 60.72

1.618 = 58.18

Above is an example of a price projection on the daily chart of (QSFT), Swing X to A was measured for a total of 8.4 points. This range was multiplied by our Fibonacci ratios {,618, 1.00, 1.618) and each of the those numbers were then added to swing В low of 13.24 to get the following projection resistance numbers:

.618 = 18.43

1.000 = 21.64

1.618 – 26.83

Through the use of extentions studies, we will be calculating key areas of price support and resistance.

An extension is very similar to a retracement. It is „recapturing“ a percentage of the previous move (X:A illustrated above). The difference between a retracement and an extension is that an extension recaptures more than 100% of the previous X;A move-Basically, В will go beyond X. The specific ratios I use for extensions are 1.272 and 1.618. Let's assume X is $20 and A is $30 in Figure 2.1. Below is the process to determine Fibonacci extension levels.

First, let's calculate what the range of X to A is:

Price @ A: $30

Price @ X: $20

Range = $10.00

Next let's multiply this range by each Fibonacci ratio:

Ratio Points

1,272 $12.72

1.618 $16.18

Finally, take the number from each ratio and subtract it from A, which is $30.00. This will provide you with Fibonacci extension levels:

So, if I were to ask what the 1.272 extension level of swing X:A in Figure 2,1 was, you would answer 17.28. This is a support level. Now we can do the same type of analysis to determine resistance. Let's look at Figure 2.2 where X is 30 and A is 20. Instead of subtracting from A (like in Figure 2.1), we will add to A to determine resistance:

Let's look at a couple of charts with extensions at work.

The daily chart of IGT above put in a swing low point (X) at 73.21. Over the next 12 trading sessions IGT traded up to (A), which was a high of 80.10. A reversal to the downside began, so, as soon as the swing high (A) was established, we could calculate the Fibonacci extension levels that might act as support and stop the downside movement. Remember, extensions are basically retracements of greater than 100% of the X to A move. The specific ratios we use are 1.272 and 1.618. Those levels came in at:

1.272 = 71.33

1.618 = 68.95

Check this out!

IGT traded down to the 1.272 extension level of swing X:A at 71.33 and did an immediate reversal and went up over 7 points in eight trading sessions.

Here is the same stock from a different perspective. Here we look to calculate resistance extension levels based on swing X:A.

The daily chart of (IGT) above put in a swing high (X) at 78.40, Over the next 12 trading sessions (IGT) traded down to (A), which was a low of 73.21. A reversal to the upside began. So, as soon as the low (A) was established, we could calculate the Fibonacci extension levels that might act as resistance and stop the upside movement. Remember, extensions are basically retracements of greater than 100% of the X to A move. The specific ratios we use are 1.272 and 1.618. Those levels came in at:

1.272 = 79.81

1.618 = 81.60

Through the use of expansions studies, we will be calculating key areas of price support and resistance.

Price expansions are similar to projections with one small difference. Instead of measuring swing X:A and projecting it from B, we project the values from А. В is not used in this study. Basically, expansions measuring swing X:A „expand“ that swing further in the direction price is headed using the following Fibonacci ratios: .618, 1.00, and 1.618. These price levels will be labeled as (Exp) on the charts. To calculate an expansion only two points must be established (X, A). For illustration purposes, let's say X is 50 and A is 45 in Figure 4.1.

First, let's calculate what the range of X to A is:

Price @ A: $45

Price @ X: $50

Range = $5.00

Next let's multiply this range by each Fibonacci ratio:

Ratio Points

0.618 $ 3.09

1.000 $ 5.00

1.618 $ 8.09

Finally, take the number from each ratio and subtract it from A, which is $35.00. This will provide you with Fibonacci projection levels.

So, if I were to ask you for the 0.618 expansion of swing X;A, the answer would be $41.91. The price levels in the table above represent Fibonacci price support decisions. The exact same analysis can be done for Figure 4.2 to calculate projection levels acting as resistance. In Figure 4.2, X is $30, and A is $40. This time instead of subtracting from A we would add to A, to determine price resistance levels:

Expansions are a „confirming“ Fibonacci study. This simply means that the other three studies — retracements, extensions, and projections — should be the first price studies applied to a chart. Then utilize this price study to confirm a potential price support or resistance zone.