There is more to the world of Fibonacci than retracements, arcs, fans and timezones! Every year new methods are developed for traders to take advantage of the uncanny tendencies of the market towards derivatives of the golden ratio. Here we will discuss some of the more popular alternative uses of Fibonacci, including extensions, clusters and Gartleys, and we'll take a look at how to use them in conjunction with other patterns and indicators.

Fibonacci Extensions
Fibonacci extensions are simply ratio-derived extensions beyond the standard 100% Fibonacci retracement level. They are extremely popular as forecasting tools, and they are often used in conjunction with other chart patterns.

The chart in Figure 1 shows what a Fibonacci extension forecast looks like.

Figure 1: The above is an example of how the Fibonacci extension levels of 161.8% and 261.8% act as future areas of support and resistance.
Source: Tradecision

Here we can see that the original points (0-100%) were used to forecast extensions at 161.8% and 261.8%, which served as support and resistance levels in the future.

Many traders use this in conjunction with wave-based studies - such as the Elliott Wave or Wolfe Wave - to forecast the height of each wave and more clearly define the different waves. (To learn more about Elliott Waves, see Elliott Wave Theory. For further reading on Wolfe Waves, see Advanced Channeling Patterns: Wolfe Waves And Gartleys.) Fibonacci extensions are also commonly used with other chart patterns such as the ascending triangle. Once the pattern is found, a forecast can be created by adding 61.8% of the distance between the upper resistance and the base of the triangle to the entry price. As you can see in Figure 2 below, these levels are generally deemed to be strategic places for traders to consider taking profits.

Figure 2: Many traders use the 161.8% Fibonacci extension level as a price target for when a security breaks out of an identified chart pattern.
Source: Tradecision

Fibonacci Clusters
The Fibonacci cluster is a culmination of Fibonacci retracements from various significant highs and lows during a given time period. Each of these Fibonacci levels is then plotted on the "Y" axis (price). Each overlapping price level makes a darker imprint on the cluster, enabling you to see where the most significant Fibonacci support and resistance levels lie.

Figure 3: An example of Fibonacci clusters is shown on the right side of the chart. Dark stripes are considered to be more influential levels of support and resistance than light ones. Notice the strong resistance just above the $20 level.
Source: Tradecision

Most traders use clusters as a way to gauge support and resistance levels. One popular technique is to combine a "volume by price" graph on the left side, with a cluster on the right side. This allows you to see which specific Fibonacci areas represent intense support and/or resistance - high-volume, dense areas are key support and resistance levels.

This technique can be used in conjunction with other Fibonacci techniques or chart patterns to confirm support and resistance levels.

The Gartley Pattern
The Gartley pattern is a lesser-known pattern combining the "M" and "W" tops and bottoms with various Fibonacci levels. The result is a reliable indicator of future price movements. Figure 4 shows what the Gartley formation looks like.

Figure 4: An example of what bullish and bearish Gartley Patterns look like.

Gartley patterns are formed using several rules regarding the distances between points:

  • X to D - Must be 78.6% of the segment range XA.
  • X to B - Must be near 61.8% of the XA segment.
  • B to D - Must be between 127% and 161.8% of the range BC.
  • A to C - Must be 38.2% of segment XA or 88.6% of segment AB.

How can you measure these distances? Well, one way is to use Fibonacci retracements and extensions to estimate the points. You can also download a free Excel-based spreadsheet from to calculate the numbers. Many traders also use custom software, which often includes tools developed specifically to identify and trade the Gartley pattern.

Fibonacci Channels
The Fibonacci pattern can be applied to channels not only vertically, but also diagonally, as seen in Figure 5.

Figure 5: Fibonacci retracement when used in combination with Fibonacci channels can give a trader extra confirmation that a certain price level will act as support or resistance.
Source: MetaTrader

Again, the same principles and rules that apply to vertical retracements apply to these channels. One common technique employed by traders is the combination of diagonal and vertical Fibonacci studies to find areas where both indicate significant resistance. This can indicate a continuation of the prevailing trend.

Conclusion - Putting It All Together
Fibonacci patterns are best used in conjunction with other patterns and indicators. Often, they give a precise point to a more general move. A Fibonacci extension will give you a specific price target, but it is useless if you don't know that a breakout is likely to occur. It takes the triangle pattern, volume confirmations and an overall trend assessment to validate the Fibonacci price target.

By combining indicators and chart patterns with the many Fibonacci tools available, you can increase the probability of a successful trade. Remember, there is no one indicator that predicts everything perfectly (if there were, we'd all be rich). However, when many indicators are pointing in the same direction, you can get a pretty good idea of where the price is going. (To learn more about Fibonacci studies, see Fibonacci And The Golden Ratio.)

Related Articles
  1. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  2. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  3. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  4. Chart Advisor

    Watch These Stocks for Breakouts

    These four stocks are moving within price patterns of various size, shape and duration, and are worth watching for a breakout
  5. Chart Advisor

    ChartAdvisor for November 20 2015

    Weekly technical summary of the major U.S. indexes.
  6. Chart Advisor

    Like Ranges? These Are Stocks to Consider

    Whether you want to trade the price fluctuations within a range, or await a breakout, here are four stocks for you.
  7. Chart Advisor

    Is This The Beginning Of A Downtrend In Home Builders?

    Falling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
  8. Investing

    The Semiconductor Sector is On the Verge of a Breakout

    The semiconductor sector may be on the verge of a major breakout that provides market leadership in 2016.
  9. Forex Education

    Profit From Currency Spikes With This Memory-Of-Price Strategy Variation

    Use this single-entry strategy to capitalize on currency spikes by anticipating reversals.
  10. Chart Advisor

    These Commodity ETFs Are Still Stuck Within A Downtrend

    Traders are turning toward exchange traded funds to get a sense of where the market is headed next. Taking a look at the charts in this article, it becomes clear that the bulls have their work ...
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  3. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>
  6. How was the Fibonacci retracement developed for use in finance?

    The use of Fibonacci retracements in stock trading was popularized by noted technical analysts W.D. Gann and R.N. Elliott. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center