Understanding and Trading Fibonacci Lines on a Chart | Technically Speaking: Advanced Charting

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but as we start to get into the bigger numbers they start to settle in solidly at 1.618 and then we just get more decimal points off to the right get rid of that extra 5. anyway in any case that's that's known as the golden ratio because when we start to when we start to apply that mathematically to uh to interestingly what what would seem to be unrelated concepts we start to see this number has strong application for example if we look at the arrangement of seeds in a sunflower seed apartment in a sunfl in a sunflower if i were to give you a you give you an assignment we know the sunflower the the center portion what do we call that i don't know the middle of the flower it's a it's a circle and if our task were to arrange as many or fit as many seeds into that circle as we can what we might discover through a laborious process of elimination is boy if you if you were to arrange the seeds in two interlocking spirals that um that's the best way to fit in as many seeds as you can so it's not to make rose or you know put in expanding circles or anything like that it's actually to spiral them one against the other and actually that can be described that arrangement can be described mathematically with this ratio and we see this ratio in other areas of nature so for example the arrangement of the chambers in a nautilus shell a nautilus shell is that weird little squid snail looking creature that sort of jets itself through the water you know what i'm talking about sometimes you'll see you know fossilized nautiluses are not what we call nautiloids i don't know in any case if we you see them sometimes the bookend where they've been sliced and you can see these these uh spiraling chambers growing larger and larger well the size of those chamber chambers increases pardon me as that animal is growing within its shell and they grow it at approximately a golden ratio rate of growth so this is all interesting for math and for nature but what some traders have done is they wonder to themselves are there certain behaviors in the proportions of price activity that might mimic what we're seeing in mathematics or in biology and in in some circumstances it seems that there can be all right so we'll look at that as an example so that actually will show up as one of our fibonacci lines do you see that right there 161.8 that's just moving the decimal point on this so where do these other lines are these other numbers come from well they're just other ratios so for example instead of taking one number in the sequence and divide it by the one just before we might take a number of the c sequence and divide it by the one just after so for example 55 divided by 89. it's just the reverse of what we've already done well i even screwed up that i just noticed let's get that corrected there we go in any case 55 divided by 89 gives us what point six one and with a little bit of rounding eight and as we look at our fibonacci tool there we go 61.8

all that this has really done is it has assumed a retracement to the 61.8 level and then it's tacked on this distance right here to that level so in other words retracement right down to here in our example it would be right down to about 38.83 and then projecting a target or an upswing up to about 4146 but this had been this would have been kind of interesting at the time because was there anything on the s p at any time in history to indicate that there may be a target up here if we're just looking at a traditional chart application nope we've never been there before not once ever so that's where this might be adding some value at least in theory it's not a guarantee that we're gonna hit those targets and in this case though you can see the s p moved up very nicely right up into that range and then it started to get a little bit choppy chopped around and then started pulling back all right so that's interesting now sometimes this signal fails though it's possible that a trader might see this we pull down into this this 50 to 61 range um so how might how might we look to um adapt for that well one one adaptation is that a traitor instead of just waiting and the moment we get down between 61.8 and 50 maybe they wait at least for the appearance of a of a bullish candle so here we did get a nice bullish candle right there after it entered that 61.8 or 50. but in any case sometimes it fails completely and the stock or the index continues lower and in that case some investors will look at the 38.2