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.

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.

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.