How to Use Fibonacci Arcs

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Fibonacci Arc Definition and Uses

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.

Key Takeaways

  • 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.

  1. In an uptrend, connect the most recent swing high (A) with a significant prior swing low (B). This is the base line.
  2. 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.
  3. 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.
  4. 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.

Trading With The Golden Ratio

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 a 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.

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How to Use Fibonacci Arcs

Fibonacci Arcs don’t get a lot of press compared to Fibonacci Retracements or Extensions, yet Arcs offer something these other indicators do not–a time element. While retracements and extensions are concerned with just the magnitude of moves, Arcs factor both magnitude and time, offering areas of future support or resistance that will move as time progresses.

The Fibonacci Arc is drawn directly on the chart. Similar to other Fibonacci tools the tool connects a swing high and swing low, which then creates series of arcs.

The Arcs occur at Fibonacci retracement levels: 23.6%, 38.2%, 50%, 61.8% and 76.4%. Although by default, usually only the 38.2%, 50% and 61.8% are shown. The levels are not horizontal though, as with Retracements and Extensions.

Figure 1. USD/CAD with Fibonacci Arc

The pink boxes represent the start and finish of a major price wave, and therefore the indicator connects these points. The Arcs are then automatically displayed, showing the 38.2%, 50% and 61.8% retracements levels.

In this case, the pullback that followed touched each of these levels and bounced off of it.

When the Arcs are drawn over a large price wave, the Arcs will be large to compensate. On the other hand, small Arcs will appear if the tool is used on a small wave.

Fibonacci Arcs can be used on all time frames, from 1-minute charts to monthly charts and are applicable to major markets, such as stocks, forex, commodities and bonds.

The Arcs can be drawn on major waves, like in Figure 1, which contain a number of small waves within them, or the Arcs can be drawn on each smaller wave. Drawing the Arcs on each smaller wave, as shown in Figure 2, is more applicable to active traders who want in and out on each wave. Figure 2 shows some smaller wave leading up to the wave shown in Figure 1.

Figure 2. USDCAD with Fibonacci Arcs on Consecutive Waves

The price is unlikely to respect the exact price of a Fibonacci Arc level. This means simply placing a buy order at one of the pullbacks level as shown in Figure 1 or 2, isn’t likely a viable strategy.

In advance, we also don’t know which of the Arcs it is eventually going to respect.

Drawing the Arcs can also be somewhat subjective. If you and I connect different highs and lows we will get different Arcs. If the Arcs are used for trading then it follows that the trading results could dramatically vary, which makes testing Fibonacci Arcs as a strategy rather difficult.

Because of these drawbacks Fibonacci Arcs are generally used as analysis tools, or confirmation tools, as opposed to actually providing trade triggers.

Fibonacci Arcs are an interesting chart overlay because they factor both price and time. Typically they should be used as a confirmation or analysis type tool; highlighting areas which are likely to provide support or resistance. If you receive a trade signal from your strategy, and the signal occurs in the vicinity of one of the Arcs, then the Arcs would confirm the signal. As always, practice using and test out an indicator before utilizing it with real capital.

Fibonacci Arcs

Table of Contents

Fibonacci Arcs

Introduction

Fibonacci Arcs are half circles that extend out from a trend line. The first and third arcs are based on the Fibonacci ratios .382 (38.2%) and .618 (61.8%), respectively, which are often rounded to 38% and 62%. The middle arc is set at .50 or 50%. After an advance, Fibonacci Arcs are measured using a Base Line that extends from trough to peak. Arcs are drawn along this line with radii that measure .382, .50 and .618 of the Base Line. These arcs mark potential support or reversal zones to watch as prices pull back after the advance. After a decline, Fibonacci Arcs are used to anticipate resistance or reversal zones for the counter-trend bounce. This article will explain the Fibonacci ratios and provide examples using Fibonacci Arcs to project support and resistance.

The Sequence and Ratios

This article is not designed to delve too deep into the mathematical properties behind the Fibonacci sequence and Golden Ratio. There are plenty of other sources for that detail. A few basics, however, will provide the necessary background for the most popular numbers. Leonardo Pisano Bogollo (1170-1250), an Italian mathematician from Pisa, is credited with introducing the Fibonacci sequence to the West. It is as follows:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……

The sequence extends to infinity and contains many unique mathematical properties:

1.618 refers to the Golden Ratio or Golden Mean, also called Phi. The inverse of 1.618 is .618. These ratios can be found throughout nature, architecture, art, and biology. In his book, Elliott Wave Principle, Robert Prechter quotes William Hoffer from the December 1975 issue of Smithsonian Magazine:

….the proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it the golden mean.

Calculation

The first step is to pick the peak and trough for the Base Line. Draw the line from trough to peak for an advance or from peak to trough for a decline. The example above shows Home Depot with a Base Line from trough to peak. The radius for the first Fibonacci Arc measures 38.2% of the Base Line. The radius for the second Fibonacci Arc is in the middle of the Base Line (50%). The radius for the third Fibonacci Arc measures 61.8% of the Base Line. Three half circles are drawn based on these radii. Notice how HD reversed near the third Fibonacci Arc (61.8%).

Interpretation

Fibonacci Arcs add a time element to Fibonacci retracements. The Fibonacci Retracements Tool is based on a vertical line from trough to peak or from peak to trough. It is only concerned with the change in price. In contrast, a Base Line after an advance extends from trough to peak at an angle that is dependent on elapsed time (positive slope). A Base Line after a decline extends from peak to trough at an angle that is also dependent on elapsed time (negative slope). The slope and length of the line depend on changes in both price and time. A big price movement over a long period of time produces a long Base Line with wide arcs. Conversely, a small price change over a short period of time produces a short Base Line with narrow arcs.

Chart 2 shows Home Depot with the Fibonacci Retracements Tool and the Fibonacci Arcs. Both indicators extend from the July low to the September high. Notice how the Base Line slopes up and is longer than the vertical line in the Fibonacci Retracements Tool. Whereas the Fibonacci Retracements Tool shows static retracement levels, the Fibonacci Arcs show dynamic retracements that evolve over time. Fibonacci Arcs drawn after a decline slowly work their way lower, which denotes falling resistance zones. Fibonacci Arcs drawn after an advance slowly work their way higher, which denotes rising support zones. Despite these differences, both tools are used to anticipate support, resistance and reversals.

Support Example

Chart 3 shows Nvdia (NVDA) with two Fibonacci Arcs marking support. The first Fibonacci Arcs extend from the February low to the May high. NVDA declined rather sharply from the early May high, but reversed course in between the 50% and 62% arcs. The second Fibonacci Arcs (pink) extend from the May low to the June high. This advance is shorter so the Fibonacci Arcs are not as wide. NVDA moved lower in late June and early July, but found support near the 62% arc and moved sharply higher in mid-July.

Chart 4 shows Cleveland Cliffs (CLF) with a surge from March to May and then a choppy pullback. The stock bounced off the 38% arc in mid-May and then bounced off the 62% arc in early July. Even traders that missed this bounce were given a second chance with the flag pullback and breakout in early September.

Resistance Example

Chart 5 shows Darden Restaurants (DRI) with Fibonacci Arcs drawn from the April high to the May low. The stock rebounded at the end of May and hit resistance at the 62% arc in mid-June. After stalling for a few days, the stock moved sharply lower with a long black candlestick. Resistance in the 44-45 area was confirmed by the May-June highs (orange box).

Chart 6 shows Paychex (PAYX) with Fibonacci Arcs drawn from the May high to the July low (2008). The stock rebounded from mid-July to mid-August, but the advance hit resistance at the 62% arc. Also, notice that a potentially bearish rising wedge formed. Even though the stock moved outside the 62% arc, this sideways move is not considered a bullish breakout. PAYX traded flat for a few days and then broke support to signal a continuation of the May-June decline.

Extending the Dateline

Chartists sometimes need to add extra time to see future support or resistance levels on the chart. Chart 7 shows the S&P 500 ETF (SPY) from mid-March to mid-July with 60 extra bars added. With these additional bars, chartists can see how the arcs evolve in the future. This can be done by going to “chart attributes” and entering the number of periods for the extension in the “extra bars” box.

Conclusion

Fibonacci Arcs are used to identify potential support, resistance or reversal points. As with the Fibonacci Retracements Tool, these reversal points assume that the move is corrective in nature. A pullback after an advance is deemed a correction that will find support above the beginning of the advance. A bounce after a decline is deemed a counter-trend rally that will hit resistance below the beginning of the decline. Fibonacci Arcs allow users to anticipate the ending points for these counter-trend moves. Like all annotation tools, Fibonacci Arcs are not meant as a standalone system. Just because prices approach an arc does not mean they will reverse. Prices move right through these arcs in many cases. No indicator is perfect. This is why chartists must use other tools to confirm support, resistance, bullish reversals and bearish reversals.

SharpCharts

You can use our ChartNotes annotation tool to add Fibonacci Arcs to your charts. Below, you’ll find an example of a chart annotated with a Fibonacci Arc.

To learn more about how to add this annotation to your charts, check out our Support Center article on ChartNotes’ Line Study Tools.

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