InvestorQ : What exactly is a Fibonacci Arc and how is it applied in technical charting and trading decisions?
shrinidhi Rajan made post

What exactly is a Fibonacci Arc and how is it applied in technical charting and trading decisions?

Answer
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Riya Dwivedi answered.
1 year ago


Fibonacci is a statistical sequence of numbers that is considered to be the pattern in most structured sequences of numbers. Price patterns are believed to be adhering to the Fibonacci sequences. Let us first understand what is the basic form of a Fibonacci series? Fibonacci is a lot more about mathematical patterns and less about chart patterns. In fact, Fibonacci extrapolates these mathematical patterns into the price chart and takes it forward. Fibonacci levels are an extremely popular technical analysis tool. While the concept is quite empirically sophisticated, its application is not all that difficult. In fact, Fibonacci was a 12th-century mathematician in Italy who developed a series of ratios that is very popular with technical traders. Fibonacci ratios, or levels, are commonly used to pinpoint trading opportunities and both trade entry and profit targets that arise during sustained trends. In fact, Fibonacci ratios are not just about trades but about any general pattern that is followed by unbiased movements.

The primary Fibonacci ratios are 0.24, 0.38, 0.62, and 0.76. These are often expressed as percentages i.e. 23%, 38%, etc. Note that Fibonacci ratios complement other Fibonacci ratios: 24% is the opposite, or remainder, of 76%, and 38% is the opposite, or remainder, of 62%. As with pivot point levels, there are numerous freely available technical indicators that will automatically calculate and load Fibonacci levels onto a chart. You can go to any basic technical chart software and these can help you in identifying the Fibonacci pattern and trading based on that. Having understood Fibonacci sequences, let us turn to the Fibonacci arcs.

Fibonacci Arcs are half circles that extend out from a trend line drawn between two extreme points. Four arcs are drawn which are measured from the second extreme point, so they intersect the trend line at the Fibonacci levels of 23.6%, 38.2%, 50.0%, and 61.8%.These arcs mark potential support and resistance areas as prices retrace a portion of their move after a decline or an advance in the price levels. This sequence is popularly used to get support and resistance levels. The Fibonacci arc is a smoothened version of the basic Fibonacci sequence of numbers that we are all familiar with.