It would be inaccurate to describe stock traders as being superstitious by nature. If there is one area of business in which it is not advisable to be swayed by anything other than cold, hard fact, then the stock market would be that place. One need only look at market reactions to major world events such as disasters, changes of government and major announcements to see that what cannot be explained cannot always be trusted. In today’s markets, however, a lot of people are arguing for the benefits of something that cannot be definitively proven as yet. However, effectiveness the Fibonnaci sequence and the numbers associated with it are also not as yet disproved.
Fibonnaci retracements are among the major spin-offs from the sequence – first published in the Western world by Leonardo of Pisa more than eight hundred years ago – which is believed to govern much of what we as humans approve of. Acting unseen, the sequence can be found again and again in art, in nature and now, it appears, in the stock market. Why this happens is still a matter of much conjecture – what is not in question is that it seems to be happening. Fibonnaci channels are a variation on the Fibonnaci retracement – the difference being that they appear as diagonal lines rather than horizontal on a chart.
Fibonnaci channels appear to work as a way of identifying lines of support and of resistance in a future market. Doing this requires the trader to find the correct valleys and peaks in the market. What amounts to the right valley or the right peak is often up to the discretion or the experimentation of the person drawing the channel. It is definitely the case, however, that the individual searching for the right place to draw a Fibonnaci channel should only consider major – or wide, to put it another way – peaks and valleys.
Fibonnaci channels, as with many entities which can be classed as “variants”, are not as popular as the entity with which they “vary” – in this case Fibonnaci retracements.
However, a well drawn Fibonnaci channel can connect with an equally well drawn Fibonnaci retracement to flag up a spot where investment is likely to be rewarded. These positions are considered to almost always work as a point of strong support for the market.
Fibonacci retracements and extensions are a precise way to determine potential reversals and continuations on a price chart. Careful study of how to use this valuable tool is important no matter what you trade. The concepts are very simple and easy to apply once you grasp the basics.
Fibonacci retracements and extensions are the basis of many valuable trading systems. In fact Elliot wave theory is practically based on Fibonacci retracements. Mark Deaton is a Fibonacci user and his website http://www.fibonaccigenius.com has many valuable tools for the person wanting to learn more about using this incredible tool.
