HOW TO DRAW FIBS

Using Fibonacci retracement indicators on a graph is an excellent way to show Fibonacci levels.Applying Fibonacci retracement is not difficult at all. In this lesson, we will show how to draw FIBS in easy steps.Utilizing Fibonacci Forex retracement ratios as a support/resistance indicator can be a simple, useful tool.

ADDITIONAL READING HOW TO DRAW FIBS

Fibonacci retracement indicators that show Fibonacci levels can be useful for swing traders to identify reversals on a stock chart. By using Fibonacci technical analysis, a Forex trader can see price movements in a clearer pattern.
Stocks will often pull back or retrace a percentage of the previous move before reversing. These Fibonacci levels often occur at three points: 38.2%, 50%, and 61.8%. Actually, the 50% level really does not have anything to do with Fibonacci, but traders use this level because of the tendency of stocks to reverse after retracing half of the previous move.
Here is an example using a graphic explaining the retracement pattern:

This picture shows a graphical representation of the reversal points for stocks in an uptrend. The pattern is reversed for stocks that are in down trends.
Although Fibonacci technical analysis has become a popular tool, in most cases, you really don’t need them. When you draw a fib grid on a chart, you will notice that the grid lines up with support and resistance areas that you would see anyway without drawing the lines in! So you really do not need to draw the lines in. Instead, you can just look at a chart and estimate where the levels are. Still, using a Fibonacci Indicator can often lead to a profitable trade.

HOW TO DRAW FIBS - TEXT VERSION

Because the application of technical indicators can vary among charting software packages, we usually don’t cover how you apply a given indicator on your charts. Regarding Fibonacci retracements, however, it’s worth demonstrating the general mechanics of how you draw them and the technical analysis involved in them, because you’ll gain a better understanding of what Fibonacci levels you are really measuring and how they’re defined by whatever prior trend you select.

You can apply FIBS to your charts basically in a three step process.

• You select a high and low point for a given up or down trend
• Your charting software then calculates where a retracement of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent of that trend would occur, and
• It then draws in lines at those price levels.

Per Fibonacci theory, these are where the future counter trend is most likely to pause or reverse.

FIBONACCI TECHNICAL ANALYSIS

When doing Fibonacci technical analysis, most charting software instructions will guide you with exact instructions as to which steps are needed. They usually involve just doing the following:

• Decide which Fibonacci levels you wish to measure.
• Select Fibonacci retracements from your menu of available technical indicators.
• Indicate the price range and time period of prior trend in question by highlighting it with a simple click and drag of your mouse. Let’s see some examples.

In the first example we will draw fibs S/R for an uptrend based on a prior downtrend.

In the figure below, we wanted to locate the likely fib S/R points as the EURUSD rallied higher and thus “retraced” the prior down trend that occurred from December 2009 to June 2010. This is highlighted by the falling dotted line on the left side of the chart. The horizontal yellow lines mark those fib retracement levels that should become S/R points.

In order to do that you:Select the Fibonacci retracements option from our menu of technical indicators. At that point, the mouse cursor will change appearance to prompt us to highlight or define the range of the downtrend that we’re examining.
When that happens, place your mouse cursor where the downtrend began, left click and drag the cursor down and to the right until it hits where the down trend ended; then release the left mouse button. The yellow dotted line shows the price range that was highlighted. Now you can choose the absolute highs and lows of the candle wicks or use the highest and lowest closing prices per the candles’ bodies, on each end of the down trend’s range

FIBONACCI LEVELS

The horizontal yellow Fibonacci levels then appear. These serve as S/R zones for whatever uptrend that follows. Note the dotted line that highlights the down trend on which these fib lines are based. For example, the 23.6% fib line means that price has risen, or recovered, or retraced, 23.6% of the prior downtrend.
As with any other kind of S/R, each level is resistance until it’s decisively breached, and then it becomes support unless price falls back below it.
Notice how the 23.6% fib line, the second yellow line from the bottom, indeed looks like its 23.6%, or about 25%, of the total downtrend. Note how the fourth line up looks like it’s about in the middle of the downtrend. That’s because it’s the 50% retracement level, marking where half of the downtrend has been recovered or reversed

In the second example we drawing fibs S/R for a down trend based on a prior up trend.
To plot Fibonacci levels for a down trend, you follow the same steps as above. The only difference is that in step #3, we highlight the range and duration of a prior uptrend. That means we place our mouse cursor at the bottom of wherever the relevant up trend began, left click and drag the mouse up and to the right, and release the left mouse button at the high of the uptrend.

Select the Fibonacci retracements option from our menu of technical indicators.
The mouse cursor changes appearance to prompt us to highlight or define the range of the relevant uptrend.
To do that, place your mouse cursor where the uptrend began, left click and drag the cursor up and to the right until the top of the uptrend; then release the left mouse button. Again, the dotted line shows the price range highlighted. Here too, you can choose the absolute highs and lows or use the highest and lowest closing prices for the candles on each end of the trend’s range.
The fib retracements lines then appear as blue horizontal lines. Ignore the yellow ones for now, we’ll explain those below. These blue lines indicate S/R zones for whatever down trend that follows. Note the dotted line that highlights the uptrend on which these Fibonacci levels are based. For example, the second blue line from the top is the 23.6% fib line, and it indeed is about 25% down from the high of the prior uptrend. When price falls to that level, it means that price has fallen 23.6% from its recent high. In other words, it has retraced 23.6% of the prior up trend.
Like any other kind of S/R, each level is resistance until it’s decisively breached, and then it becomes support unless price falls back below it.
Now look again at the graph. Where do those longer yellow lines come from? These longer yellow lines are the Fibonacci levels based on the longer term downtrend shown in this lesson’s first figure.