How to Use Fibonacci Lines
In the below picture show a trend being plotted out using the Fibonacci lines. As you can see towards the left of the chart the price is steady moving upwardly (uptrend) and now price is correcting a bit (downtrend). This trader has likely already been trading in that direction already and is here is trying to find out where the most like point where the correction will stop and price will continue north.
“Fib” lines can help you do just that. So, how do you use the fib lines?
The red line in the picture below shows the swing points use to help plot the fib lines. The first point on the far left, is Point 1, is the most recent swing low. The 2nd point, Point 2, indicates the most recent swing high.
That is how you want plot your fib indicator in order to conjure some probable market turning points. If you look closely you can see price has corrected (moved lower) near the 61.8 fib line 3 times. On the third time price touched that line it broke through, near immediately the 2nd to last fib line (23.6). If you were trading and still under the assumption that price still continue higher, the next probable turning point may very well be the 23.6.
If you are buying (looking for the price to rise), find the lowest low of the most recent trend and find the nearest highest high. That will place yellow lines across different levels of price.
If you are selling (looking for the price to decrease) find the highest high of the most recent trend and find the nearest lowest low. That will place yellow lines across different levels of price.
In the example below, the trader is looking of price to climb higher. The yellow lines show you the likely reversal areas are so he can anticipate his entry (or reentry). As you can see, from the 1st blue rectangle price attempted a reversal but did not follow through and continued to go lower. The next blue rectangle is next probable reversal area.
Now, if price hits the 1st plot point (Point 1) then it may be a signal that the uptrend is over and price will be continuing lower in the opposite direction. Which would now be considered a downtrend.
Just food for thought.
As stated before this can be a powerful tool but it works best when used in conjunction with other tools that will ultimately flesh out a entire trading plan.