What is a Fibonacci Arc?
Fibonacci arcs are half circles that extend outward from a line connecting a high and low, called the base line. These arcs intersect the base line at the 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Fibonacci arcs represent areas of potential support and resistance. The arcs are based on both price and time as the arcs will get wider the longer the base line is, or narrower the shorter it is. Fibonacci arcs are typically used to connect two significant price points, such as a swing high and a swing low. A base line is drawn between these two points and then the arcs show where the price could pull back to, and potentially bounce off of.
- Fibonacci arcs are created by drawing a base line between two points.
- Fibonacci arcs generate dynamic support and resistance levels that change over time as the arc rises or falls. In other words, the support and resistance level indicated by the arc changes slightly with each passing period.
- The wideness of an arc (which is always a half circle) is a function of both the distance and time a base line covers. The longer the base line the wider the arcs.
- The base line is typically drawn between a significant high and low point, but could also be drawn between significant closing prices to see areas between those two points which could be important in the future.
- Fibonacci arcs are based on Fibonacci numbers, which are found throughout nature and some believe help forecast financial markets.
The Formula for Fibonacci Arcs is
There is no formula for a Fibonacci arc, although there are a few things to note when dealing with them. A Fibonacci arc intersects at 23.6%, 38.2%, 50%, 61.8%, and 78.6% of the baseline. Many charting platforms only show 38.2%, 50% and 61.8% by default. Fibonacci arcs are half circles, but can also be shown as full circles if desired.
How to Calculate Fibonacci Arcs
There is nothing needed to calculate a Fibonacci arc, although, here are steps and examples to help understand how they are drawn. Charting software will draw Fibonacci arcs for you.
- In an uptrend, connect the most recent swing high (A) with a significant prior swing low (B). This is the base line.
- If the base line goes from $10 to $20, the base line is $10 long, for example. The arc will intersect at 23.6%, 50% and 61.8% of that, plus any other levels mentioned above. For example, 23.6% of $10 is $2.36, so the arc will intersect at $20 - $2.36 = $17.64 on the chart. The 50% level will be at $15.
- Once the level is found that intersects the arc, draw a perfect circle using point A as the anchor. For example, visualize using a drawing compass. The pencil starts at the 23.6% level, and the anchor would go at point A. Spin the compass to draw a full or half circle. If drawing a half circle, they only need to go up to point A. Do the same thing for the other percentage levels.
- The process is the same for a downtrend. Connect a swing low (A) to a swing high (B) to form the baseline. This time, calculate the intersection point by taking the percentages of the base line in dollars and then adding them to A. Draw arcs that intersect at the percentages (23.6%, 50%, and so on) of the baseline, and use A as the anchor for drawing the circles.
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What Does the Fibonacci Arc Tell You?
Fibonacci arcs account for both time and price when showing potential support and resistance areas.
The arcs are derived from the base line that connects a high and a low. The half circle arcs show where the price may find support or resistance in the future. Following a price rise, the arcs show where the price could pull back to before starting to rise again. Following a price decline, the arcs show where the price could rally to before starting to fall again.
Arcs are considered dynamic support and resistance levels because the arc will be at a slightly different price as it curves through each passing period of time.
Since arcs provide potential support and resistance at different levels over time, the indicator infers that pullbacks that occur very quickly could be more severe (in dollar terms) than pullbacks that take a longer time to occur. For example, following an upward move, the arcs will rise over time, meaning the respective support levels for the ensuing pullback also rise over time.
The Difference Between Fibonacci Arcs and Fibonacci Retracements
Fibonacci retracements align with Fibonacci arcs at the baseline intersection points. If you draw Fibonacci arcs and Fibonacci retracements with the same baseline, the retracement level will align with where the arc intersects the base line. For example, both 23.6% levels should be at the same price on the chart. Fibonacci retracements are horizontal levels, meaning they stay fixed over time. Arcs, on the other hand, are only at the intersection point once. For every other period, they will be moving based on the radius of the arc. Retracement levels are static, while arc levels are dynamic.
Limitations of Using Fibonacci Arcs
Fibonacci arcs are meant to highlight areas of possible support and resistance, but there are no assurances the price will stop or reverse at these levels. Also, since there are multiple arcs, it is not evident in advance which arc will provide support/resistance, if any.
Fibonacci arcs are often combined with other forms of technical analysis, such as chart patterns and technical indicators. For example, traders might use Fibonacci arcs to identify potential areas of support and resistance, but wait until the price pauses and then begins to reverse off the level (starts moving back in the trending direction) before making a trade in the trending direction.