How to Use the Fibonacci Number Series

Note: This article was originally published on the Wavetimes Blog on 12 May 2009 and is linked to my book “Five Waves to Financial Freedom.”

How to use Fibonacci ratio retracements is a topic that every serious trader should look into. A few years back, I read a book by Constance Brown – “Technical Analysis for the Trading Professional”. She made a very good point on how the ‘theorist’ among technical analysts would, incorrectly, choose the extremities of a move to draw Fibonacci retracements.

Choosing the right place to draw Fibonacci ratio retracements could mark the difference between success and failure in trading decisions.

First, we will look at an Example of an incorrect use of Fibonacci Ratio Retracements in real-world trading.

Such an approach often results in them missing a good move because the market falls just short of their ideal retracement levels. The practicing professional would spend a few extra minutes to see what pressure points have occurred in recent history and choose to ignore the spikes that show up ever so often. Why make the same mistake as some poor trader whose stops were run in by the market at the extremities?

Here is a demonstration of the outcomes using the chart of the Sterling Pound. The same technique for using Fibonacci ratio retracements works equally well, whether you are considering the chart of a stock, an index, forex, or a commodity. Learning the right way to use Fibonacci Ratio retracements in Elliott Wave analysis is like winning half the battle.

Here is the preferred way to draw or use the Fibonacci ratio retracements grid: