# Fibonacci Trading – How to Find Low Risk Buying Levels in the Stock Market

This mathematical sequence basically just says that if you take 1 and add it to 1 you get 2.Â  If you add the last two numbers you’ll get the next one, which is 3.Â  Then 5, etc.

Here is what the sequence looks like: 1, 1, 2, 3, 5, 8, 13… etc.

There is also a ratio between the sequence of numbers – and that’s just a sample of the bland way mathematicians like to have fun.

But luckily it’s very easy to understand and use Fibonacci trading.

## How does Fibonacci Trading Work, and Why?

At some point someone figured they would apply these ratios to the stock market.Â  The theory is that when a stock drops to these Fibonacci trading levels, they will trigger buying and it will turn out to be a support.

Now hash tag Fibonacci trading has gone viral – and just about every trader uses it for technical analysis.

Just for this reason alone, you should also.

Remember those mathematical ratios we talked about?

There are many of them, but for Fibonacci trading these are the crucial ones:

• 23.6%
• 38.2%
• 50%
• 61.8%
• 76.4%

To put it simply, if a stock rallies \$10 in the latest bullish trend and it starts selling off you would expect it to find some interim support 23.6% lower, or a \$2.36 sell off from the highs.

If this support does not hold and the price breaks lower, the next buying level would be 38.2% lower or a \$3.82 drop in stock price from the top.

Now let’s look at a few examples of how to apply this Fibonacci trading tool on a few stocks.

Then we’ll get into how to actually include this into your trading plan.

You do have one right?

If not, you’ll definitely want to check out our options pro subscription which walks you through the entire development process.

## Fibonacci Trading – Examples of Support

Before I walk you through some examples, it’s important to note a few rules about drawing Fibonacci trading supports (sometimes called Fibonacci Retracement):

• The starting point of the move must be an extension of the previous trend (bullish or bearish)
• The ending point must be at the highest point reached in the move (bullish) or lowest point in a bearish trend

These rules might seem simple, but they take some practice to get accustomed to.

Here is an example of a Fibonacci retracement on AMD stock (Advanced Micro Devices – the chip maker):

AMD Daily Stock Chart

Here are some great observations you can now make using Fibonacci trading techniques:

1. The 23.6% support level at \$12.41 worked like a chart the first time down in July
2. The 38.2% support level is next at \$10.37
3. The 50% is \$8.73
4. The 61.8% is \$7.09
5. And 76.4% is \$5.05

If you are wondering how we got those numbers, look at the image above at the top left – you’ll see they are listed and color coded.Â  They are calculated from my inputs of where the low was at \$1.76 and the high at \$15.70 – they are listed in grey.

These levels are amazing places to look for a buying opportunity because the price can either bounce from here for the short term, or continue to move in the overall trend direction which is bullish in this case.

Let’s look at Fibonacci trading levels on Ebay stock – symbol EBAY:

Ebay Daily Chart

You’ll notice that it has not yet hit the first support level at \$35.28 – meaning it’s too early to look for a buying opportunity.Â  Ebay has a long way to drop before it looks good for a low risk buy.

How do we know which levels to trust and use for our trading?

We’ll look at that next.

Qualifying trades is very different than finding support levels.

Often time traders just want one single price where they should buy so they can make millions.

News flash – no one knows these prices because the market is dynamic and develops in real time.Â  Anyone that tells you they know when to buy is lying to you, and most importantly to themselves.

It’s all bout using levels and then using your strategy to qualify good trades, then execute that trade with extreme focus to risk management. That’s the secret formula to trading success.

When using Fibonacci trading principles, it’s important to remember they are just one tool in a box full of many.

They’re purpose is to give you a support level where a stock may stop dropping, where it may be a good buying opportunity.

You then need to pull out other tools to setup the trade and find out what qualifies a “good trade” and when to actually pull the trigger to buy. We teach you this process in our options pro subscription, in a step by step fool-proof way.

Here is an idea of how to apply Fibonacci trading to your strategy:

1. Wait for stock to hit Fibonacci trading level
2. Wait to see volume increase as stock price jumps
3. Look for the first pull-back opportunity to get long
4. Place stop loss below the Fibonacci level
5. If this fails, repeat process at next Fibonacci trading level below

## Fibonacci Trading – Using a Stock Screener for Opportunities

But did you know that you don’t need to go through thousands of stock charts to find the opportunities?

You can use a stock screener to show you symbols that have hit a retracement level!

While this sounds like a huge time saver, I also have to caution you that computers sometimes can’t find the right lows and highs to draw from. This throws off everything, and gives inaccurate results.

I recommend doing the work on your own.Â  First, you will master the topic and second you will be in full control.

If you just want ideas to confirm your analysis, one good screener is called the TheGreedyTrader .com.

Check them out – we are not affiliated in any way.

Here’s a snapshot of how many stocks match the criteria as of today:

The Fbionacci trading tool isn’t going to be the holy grail you are looking for. But if you are still looking for a holy grail I suggest you quit.

Truth is that the real holy grail is knowing there is no real holy grail.

Fibonacci retracements will be a great tool in your trading tool kit, but it is not to be used as a stand alone system or strategy.

The best results happen when you apply Fibonacci levels in a well structured and proven trading plan.