How to Use Fibonacci Arcs

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Use Fibonacci Arcs

This is a charting tool that creates three curved lines that are drawn for the purpose of anticipating key support and resistance levels, and areas of range that are used to measure the different retracement levels within a market.

Click on the Arc to activate it. (It turns dark grey.)

Click on the Arc to select it, place the mouse cursor on the chart, click and drag to the location. (The small squares on the sides indicate that the Arcs have been selected.)

To move the object to another location, click, hold down and drag it to the new location.

To change the Color of the Arc rings, click on the Color number to display the drop-down menu at the end of the row.

Select and click on a color from the drop-down menu.

To increase or decrease the arc size, click, on the center or the outer rim square, hold down, and drag it to the desired size.

To remove the Arcs, click on the object inside the squares and press Delete to remove it from the chart. Refer to the Figures below.

Fibonacci Arcs in Forex trading

Fibonacci Arcs represent curves, which serve as potential support and resistance lines on the Forex chart. Fibonacci Arcs were notedly popularized by a well-known Forex trader, financier and founder of the wave theory Ralph Nelson Elliott.

Fibonacci numbers represent subsequent row of numbers 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so long up to infinity. Secret of this row is that every subsequent number is related by the previous according to a certain ratio. At present, the best known Fibo coefficients are : 4.235, 2.618, 1.618, 0.618, 0.382, 0.236.

To proceed to building of Fibonacci Arcs in MetaTrader 4 trading terminal, you need to choose “Insert – Fibonacci – Arcs” in the toolbar. Further on the chart you need to mark two points on extreme points of the price (top – bottom, top – top, bottom – bottom and bottom- top). The second extreme point serves as the center of Fibonacci Arcs, whereas the rest curves are rendered according to Fibo proportion. Lines are put by a half-circle. If in “Properties” of Fibo Arcs you put the tick on front of “ellipse”, lines will take the correspondent geometrical form.

But marking two points are not enough for drawing Fibonacci Arcs. Apart from selection points, you need to indicate the scale. The scale is the relation of pips number of vertical axis to the number of bars of horizontal axis of the object. Those acquainted with Gann Forex methods should take the same scale they chose for angles. The scale for each instrument should be taken by selection. Usually for time-frame H1 the scale is equal to 1 – 2 for 4 digits or 10-20 for 5 digit quotes.

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Let’s consider the example of Fibonacci Arcs’ operation on the chart. The scale is : 20 (5 digits ).

Pic. 1 Fibonacci Arcs

With the correct scale selected, error of level practice is minor. Of course, Fibo levels not always can work, even if the scale is correct. This is the market and it has its own view. But often the extent of precision is astonishing. Many traders applying Gann methods successfully combine Fibo Arcs with other coefficients.

Conclusion

Fibonacci Arcs are a very interesting instrument, not least because they can predict future objectives. They serve as spatial expansions and corrections, work as resistance and support, and one more time prove mathematical nature of the market. Besides, combination of Fibonacci Arcs with other technical and graphical instruments allow to forecast not only about price objectives, but about time objectives as well.

How to Use Fibonacci Expansions

Fibonacci Expansions Talking Points:

  • Fibonacci Expansions plot possible levels of support and resistance.
  • They are created by tracking primary trending moves and their retracements.
  • Traders can use Fibonacci Expansions to set multiple profit targets for their trades.

A concept I always teach is the importance of using support and resistance levels to decide when to get out of positions. Just like getting a good entry is important for a successful trade, you must also ensure you are exiting your trades at levels that maximize your gains. This article aims to assist traders in finding profit maximizing exit levels using Fibonacci Expansions.

What are Fibonacci Expansions?

Fibonacci Expansions are price levels created by tracking a price’s primary move and its retracement. The resulting price levels are then drawn on the chart in an area that would normally be difficult to gauge support and resistance using ordinary charting tools. This makes Fibonacci Expansion especially useful for picking profit targets when trading trends.

When faced with an upward trending currency pair, there are going to be times when price temporarily moves counter to the trend. We call these moves pullbacks or retracements. Once this counter move is exhausted, price resumes back in the direction of the primary trend and often times will break to new highs. It is at that moment, that Fibonacci can be used.

While the familiar Fibonacci Retracements are used to determine how far the price might originally retrace, Fibonacci Expansions can help us determine where price might head after the retracement is exhausted. On the EUR/USD daily chart below, I have highlighted a primary move followed by a retracement move.

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How Do You Draw Fibonacci Expansions?

Learn Forex: Adding the Fibonacci Expansion/Extension

Once you have selected Fibonacci Expansions, we will need to select three price points to setup the tool properly. We will click a total of 3 times on the chart at the following price levels, in the following order.

  1. The beginning of the primary move, the low.
  2. The end of the primary move, the high.
  3. The retracement, the swing low.

After clicking OK, we should see several horizontal lines projected on the chart.

Learn Forex: Drawing and Reading the Fibonacci Expansion

How Do You Interpret Fibonacci Expansions?

This particular example on the EUR/USD daily chart is utilizing the more popular 0.618, 1.000 and 1.618 expansions. (There are also optional expansions at the 2.618 and 4.236 levels that you could add). All these lines can be considered resistance levels as the price trends higher, making them perfect areas to place profit targets.

We can see that price quickly hit the 1st profit target before consolidating, and then later broke upwards towards the 2nd profit target before retracing lower. It hit each of these prices on the nose before price regrouped for its next move. This gave us some spectacular exits for a long trade. If we remained a EUR/USD bull, our next target would be right below 1.4250 (at the 1.618 Fibonacci Expansion).

Scaling out of a trade with multiple targets is an effective money management strategy allowing you to lock in profits as the position matures. Just like diversifying your portfolio can help smooth out your overall returns, having multiple profit targets smooth out your returns on a trade by trade basis.

Frequently Asked Questions (FAQS)

Can you manage risk using fibonacci expansions?

Yes. Managing risk involves using take-profits, stop-losses and limiting leverage. Fibonacci expansions can be used to exit a trade using the profit targets spoken about above. A stop-loss can be used below the first retracement to ensure a positive risk-reward ratio. At DailyFX we recommend using a positive risk-reward ratio on all trades and limiting the amount of capital risked to 1% per trade. There is a lot thats goes into becoming a successful trader, like positive risk-reward ratios and discipline. If you are new to trading we recommend you download our free Forex For Beginners guide to ensure you start on the right path.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Draw Fibonacci Arcs

I am attempting to create an application that draws Fibonacci Arcs similar to these.

However, I’d like full circles instead of arcs, and I’d like to draw more than the three Fibonacci lines shown in the picture. I’ve created an application using JFreeChart to attempt to accomplish this. However, here is the result when trying to draw the same arcs (but as circles) shown in the previous picture.

Initially, it just looks wrong, but when I zoom out, it is indeed a circle, but it’s way too big.

To calculate the arcs, you draw a line, then take a Fibonacci ratio – let’s use .381 for example – the percentage of that line. If you look at the first picture, you’ll see the innermost arc intersects the line at .381% the distance of the line from the centre of the circle. First I calculate this point. Then I construct a line from the .381% point to the centre. Then I take the distance of this line, which should be the radius. Then I use this radius to draw the circle.

Here’s the code to calculate the radius. Where stop and start are the stop and start points of the line drawn.

Here is the code to calculate the distance of a line

I get back a list of circle objects (this is an object I created that holds the radius and centre point) one for each circle that needs to be drawn and then draw them.

I think the issue has something to do with how the x-axis of time and the y axis of price doesn’t exactly correlate. What I mean is, if the radius is 20, you’ll be going 20 units away from the centre at each point. So say you’re stock price is only 5 dollars, at your lowest point you will then be at -15. If that is the case, I have no idea how to fix it. But it also could be some error in my logic. Any ideas would be appreciated.

EDIT: While the bars look like they may be weekly bars in the first picture, they are indeed daily bars. Also, I have already converted the coordinates from data space to x y coordinates. I use this code below to do that.

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