How do you determine your Fibonacci levels?
First off fibonacci is a self-fulfilling trader “prophecy” – meaning it works because lots of traders look at them and think that they work. With that in mind here are some quick and dirty rules we use to determine fibonacci levels:
1) first off I only use the three major levels – 38.2%, 50% and 61.8% – because those are the levels most other traders look at.
2) the larger the timeframe, the better. This means 1h and above.
3) I connect the highs/lows, NOT the close/open (so the tips of the wicks, not where the body starts/stops)
4) the more obvious the high/low the better. This means there has not been a major correction in the middle of a high/low. For example, open up a daily chart and look at 10/2/09 – 10/26/09. That whole time period is one steady uptrend. It is obvious where every trader should place the high and the low. And because Fibonacci is self-fulfilling the more obvious to everyone the better, right?
For a good example of this in action check out this chart from 10/16/09 (click chart to enlarge).
See how from the bottom (0% – bottom yellow line) to the top (100% – top yellow line) there is very little in the way of correction or retracement? It is obvious what the high/lows are in this scenario and that is when fibonacci works best. And, what do you know? We got a great bounce of the 38.% retracement level for 90+ pips!