Fibonacci trading tools – such as retracements, arcs, fans and clusters – are predicated on the mathematical properties of the Fibonacci sequence. Believing that trading (like human nature) groups into approximately measurable patterns that bear some relationship with derivations of the Fibonacci, traders and analysts use Fibonacci clusters to see which support and resistance levels have a higher probability of reversal than others.
Forex traders implement a Fibonacci cluster analysis just like traders of traditional stocks do. They identify different groups of confirmed Fibonacci retracements over time and center breakout and reversal trades along the areas of greatest concentration. All Fibonacci tools are implemented manually and subjectively based on the individual investor. All support and resistance zones are in a sense subjective, but Fibonacci trading (like Elliott wave trading or other security-independent tools of analysis) magnifies this subjectivity. Traders and analysts are more likely to use clusters as a way to confirm support and resistance levels that have been signalled by another indicator.
One common method is to combine an indicator that shows trading volume by price, maybe even another graph. This allows the trader to see which areas of high support and resistance also correlate with high trading volume.
Traditionally, Fibonacci clusters are represented on a currency pair price chart as a series of shaded bars along the far right y-axis. Whenever a retracement level functions as a support or resistance line, a line is added to the cluster column. Each overlapping retracement level makes the corresponding section on the cluster column darker. Areas of the highest concentration are considered to be more significant support and resistance zones.