This technical analysis guide covers the Fibonacci Arc with a detailed example explained.
Read on to find out what Fibonacci Arcs are, what data they show on a chart, and what insight these arcs allow traders to gather to maximize their speculations when trading.
What Are Fibonacci Arcs?
Fibonacci Arcs are percentage arcs based on the distance between major price highs and price lows.
Therefore, with a major high, major low distance of 100 units, the 31.8% Fibonacci Arc would be a 31.8 unit semi-circle.
The chart below of the S&P 500 exchange-traded fund (SPY) shows an example of a Fibonacci Arc:
What Does The Example Chart Show?
As is seen in the chart above, after the significant bear market, the rally was stopped by the 50% arc; the 50% arc retracement acted as resistance (see: Support & Resistance).
The S&P 500 then used the 38.2% arc as support, bouncing between the 50% arc and the 38.2% arc for many months.
From The Resistant Arc The New Resistance Level
After the price broke through the resistance arc at 50%, the price moved up to the next significant Fibonacci ratio, 61.8%, where it found a new resistance level.
The prior resistance level at 50%, after being broken, became a new support level. The next Fibonacci arc was at 100%, where the price met resistance.
Yet another helpful Fibonacci tool is the Fibonacci Fan, discussed on the next page.
Where Can I Start Trading Using Fibonacci Arcs?
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What is the Fibonacci sequence?
The Fibonacci sequence is a mathematical formula that consists of a sequence of numbers, in which the next written number is always the sum of the previous two numbers that come before it. This is an example of the beginning of a Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34… and so on.
What do Fibonacci arcs show in a trading chart?
A Fibonacci arc stretches from the midpoint of the highest and the lowest values in a chart (see this example). First, a base-line is drawn between these two polar values, from which the Fibonacci arc shows significant support and resistance points in the chart. Traders use these points to consider their next moves.