Fibonacci Price Projections

What is it?

Fibonacci price projections is another support and resistance indicator that uses Fibonacci ratios to analyze price movements and identify potential support and resistance levels. It however differs from Fibonacci price retracements and price extensions in that it performs a proportional study of the current price swing in relation to a previous swing in the same direction. As with other Fibonacci studies, the proportions used in Fibonacci projection studies are based on the mathematical relationships, expressed as ratios, between the numbers in the Fibonacci summation series.

Some charting applications have this tool labeled as Fibonacci Expansions.

How is it calculated?

As with other Fibonacci studies, the key Fibonacci projection levels are found by performing mathematical operations on the numbers in the Fibonacci summation series, and on the results of those operations. The same levels used in Fibonacci price extensions are used in Fibonacci projections:

  • The first ratio of 161.8%, which is the "golden ratio" or the "golden mean", is found by dividing a number in the sequence by the number that precedes it. For example: 21 ÷ 13 = 1.6154, 34 ÷ 21 = 1.6190 and 55 ÷ 34 = 1.6176.
  • The 261.8% ratio is found by dividing a number in the sequence by the number that appears two places before it. For example: 34 ÷ 13 = 2.425, 55 ÷ 21 = 2.619 and 144 ÷ 55 = 2.61818. It is also the square of 1.618 (1.618 x 1.618 = 2.618).
  • The 423.6% ratio is found by dividing a number in the sequence by the number that appears three places before it. For example: 55 ÷ 13 = 4.2308, 89 ÷ 21 = 4.2381 and 144 ÷ 34 = 4.2353. It is also the sum of 1.618 and 2.618 (1.618 + 2.618 = 4.236).
  • In addition to these three ratios, the 127.2% extension level is also used. This level is the square root of 1.618 (√1.618 = 1.272).
  • Some traders also use the 61.8% Fibonacci ratio, which is the inverse of the 161.8% ratio.

How is it used?

The application of Fibonacci projections differ from other studies in that two price waves are required: an initial wave and a completed wave in the counter direction. The Fibonacci price projection is then projected from the end of the counter trend move.

When using Fibonacci projections, the technical analyst waits for the market to turn and then applies the Fibonacci projection ratios on the price wave that preceded the last movement. This study is then projected from the end of the last price swing. This requires three points: a previous swing high and swing low followed by another swing high in a down trend, or a previous swing low and swing high followed by another swing low in an uptrend. The Fibonacci ratios are applied to the swing high to swing low in a down trend and projected from the next swing high, or from the swing low to swing high in an uptrend and projected from the next swing low. Horizontal lines are then drawn at these levels and are used a possible support or resistance levels.

Multiple Fibonacci projections can also be drawn by applying the Fibonacci ratios to different price waves in the same direction and projecting those studies to the start of a price movement in the direction. This creates multiple levels with areas were two or more Fibonacci levels are in close proximity being more significant.

Chart Example

The following chart shows a Fibonacci Price Projection on daily chart of the GBP/USD. The initial price study is taken from the swing low made on August 2, 2013 to the swing high made on August 21, 2013. The resulting levels are then projected to the next swing low that was made on August 28, 2013. Notice how the subsequent rally has already met resistance twice at the 127.2% projection level. This may have been a good level to take profit.

GBP/USD chart with Fibonacci Projections
Fibonacci Projection on a Daily GBP/USD chart

Wealth Warning

Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.

Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!

How do you know if you've drawn the Fibonacci lines from the right levels?

When drawing Fibonacci projection lines, there are usually a number of swing highs and lows you could use for your projection study. Choosing which levels to use can be a challenge at first but here are a few simple guidelines that will eliminate most of the uncertainty.

In a projection study you would want to compare the proportional movement of the current price swing to a previous price swing in the same direction. The previous swing in the same direction as the current swing is usually the most significant but other swings in the same direction could also be used. The important thing is that the price swing must be in the direction of the swing you want to analyze and the projection study must be shifted to the start of the current swing.

Another useful trick is to check if the market respected those levels in earlier price movements, particularly the 100%, 161.8% and 261.8% levels. If the levels were respected previously, they would probably hold some significance going forward.

Related Indicators:

Support and Resistance Indicators

Support and Resistance
Support and Resistance

Support and Resistance indicators are usually drawing tools such as Andrews' Pitchfork, Gann Lines and Fibonacci Retracements that are drawn directly on the price chart. These indicators are usually a set of lines that attempt to forecast areas of support and resistance in an existing trend. They indicate where the trend could meet support or resistance. Most of these indicators also indicate the possible end of the existing trend. This occurs when the support or resistance line is broken.

When the support or resistance ...

Fibonacci Retracements

Fibonacci Retracements
Fibonacci Retracements

Fibonacci Retracements is a popular support and resistance indicator based on the proportional relationship between the numbers in the Fibonacci sequence. The Fibonacci sequence is the sum of the two numbers beginning with 0 and 1. The key ratios between these numbers are: 161.8%, 61.8%, 38.2% and 23.6%. These ratios, and the 50% ratio, are used to divide a price movement in a wave, and plot horizontal lines to determine where a retracement could find support or resistance before the trend resumes.

Fibonacci retracement levels are ...

Further Reading: