Fibonacci Arcs

[Jeff]

Fibonacci arcs are created by first drawing an invisible trendline between two points (usually the high and low in a given period), and then by drawing three curves that intersect this trendline at the key Fibonacci levels of 38.2%, 50%, and 61.8%.

A savvy trader will experiment with Fibonacci arcs applied to previous market data in order to determine a chart scale that seems the most effective, and then use that in future predictions of resistance and support.

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Fibonacci Arcs are half circles that extend out from a trend line drawn between two extreme points. Four arcs are then drawn, 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.

A Fibonacci arc is constructed by first drawing a trend line between two swing points on a chart. These two points should be between a clear peak and trough on the chart. Once the line is drawn, key Fibonacci levels are placed on the chart at 38.2%, 50%, and 61.8% retracement levels. An arch is then drawn at each respective level to generate the arching angles on the price chart. Read more to learn how to use a Fibonacci arc.

Fibonacci arc trading is done by first identifying the key Fibonacci arc levels. The next step is to monitor how the stock performs at these key levels. If the stock breaks above both a recent price high and an arc resistance level (38.2%, 50% or 61.8%), a buy order should be placed. Traders should then look for the next highest Fibonacci arc level to lock in profits, or sell the position outright.

Below is a Fibonacci arc trading example, courtesy of VT Trader. This example is on a 30-minute level over a two-day period. Notice how a trough and peak are used on the chart to draw the trend line which the Fibonacci arcs are based upon. Then notice how as the price reacts from the peak it sells off sharply down to the 61.8% arc retracement level. This hidden arch level initially acted as support, but as the EUR/USD closed below the arc level, it eventually became resistance.

On the way down, the price action breaks the 23.6%, 38.2%, 50.0%, and 61.8% Fibonacci arcs. See that after each breakout in the arcs the price decreases further. Each of these breakouts gives you an opportunity to trade against the primary trend.

This trading practice involves trade entries after the price bounces from one of the arcs in the direction of the trend. Imagine the price breaks a trend and goes to one of the Fibonacci arcs. If you see the price bouncing from the arc, you should trade the stock in the direction of the bounce.

The red horizontal lines on the image represent the proper location of the stop-loss orders on these potential trades. See that the second and the third trade share the same level for a stop-loss order. The reason for this is the weak downward move after the second short signal.

Above you see the bounce from the 61.8% Fibonacci arc we discussed a couple examples ago. The red horizontal line represents the proper location for your stop-loss order. See that we use the small range, which the price creates in the time before the bounce. If the price decreases to this level, it will definitely be outside the 61.8% arc.

Some traders are very flexible on their profit-taking approach and like to let the stock run in their favor. In this manner, they prefer to stay in the trade until they receive a contrary trading signal from the stock.

The range brings the price through almost all the arcs on the chart. However, this ends when the price reaches the 161.8% Fibonacci extension arc. After touching this arc, the price bounces upwards directly above the 100% Fibonacci level.

The price continues its increase after we enter the market. An hour later, the price creates a top and begins a minor correction. Then we see another bullish bounce and the creation of a lower top on the chart.

After the price finishes the bearish impulsive move, it starts a consolidation, which begins to produce higher highs. The first bullish impulse leads the price action to the 50.0% Fibonacci arc. The price then bounces upwards and reaches the 100% Fibonacci level.

However, this is not the important price move. The second bullish impulse brings the price to the 161.8% Fibonacci extension arc and creates a little bearish bounce. This is the right moment to sell NFLX.

As you see, the price starts a rapid decrease, which goes below the 100% Fibonacci level. Then the price enters a consolidation phase. As you see, the consolidation resembles a triangle, where the lower level is flat. The tops of the consolidation are lower. In this manner, the triangle breaks downwards and we keep our short trade.

Netflix attempts another bearish move, which proves unsuccessful. The price returns to the resistance and breaks to the upside. This is the ultimate exit signal and we close our short position with Netflix.

We have discussed many trend trading strategies on the TradingSim blog. In this article, we will examine the 5 steps to counter trend trade, which consists of impulsive and corrective price moves....

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.

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.

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.

I'm not sure of the proper terminology, so lets call the actual (x,y) coordinates that represent where you are on your monitor "screen space" and let's call the (x,y) coordinates of the chart "chart space".

My issue was I was converting the points from screen space to chart space and then calculating my points. Instead, I should have calculated all my points in screen space, and then converted each calculated point to chart space.

One point to note, the radius of the circles is dependent on how much of a specific chart you're showing. A circle drawn on a 1 year chart from point a to point b will be smaller than a circle drawn on a 5 year chart from those same points.

Fibonacci arcs are concentrical circles plotted at the end point of the trendline; their radii are based on Fibonacci ratios. After the uptrend, these circles might signify support zones, while after the downtrend, they might indicate the resistance zones.In order to add the Fibonacci arcs drawing to chart, choose it from the Active Tool menu. Specify begin and end points of the trendline; the circles will be added automatically.

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