Click  Fibonacci Calculator to open a working demo of our program.
 

We will break this information up into several sections:  Definitions, Charts, Fibonacci, Summary.  You may want to print this page and keep it handy while you are learning to use Fibonacci.

Here are some definitions that will help explain what we will be discussing:

Support: A price level below which it is supposedly difficult for a security or market to fall. That is, the price level at which a security tends to stop falling because there is more demand than supply; support can be identified on a technical basis by seeing where the stock has bottomed out in the past.

Resistance: A price level above which it is supposedly difficult for a security or market to rise. Price ceiling at which technical analysts note persistent selling of a commodity or security. Antithesis of support level.

Bollinger Bands: Trading bands, which are lines plotted in and around the price structure to form an envelope, are the action of prices near the edges of the envelope that we are interested in.  They are one of the most powerful concepts available to the technically based investor, but they do not, as is commonly believed, give absolute buy and sell signals based on price touching the bands. What they do is answer the perennial question of whether prices are high or low on a relative basis. Armed with this information, an intelligent investor can make buy and sell decisions by using indicators to confirm price action.

Fibonacci Numbers: A series of technical analysis studies where charts and numeric relationships are used to pinpoint high and low price levels for a security. There are four popular Fibonacci studies: arcs, fans, retracements, and time zones. The interpretation of these studies involves anticipating changes in trends as prices near the lines created by the Fibonacci studies.

Entry Level:  The price you will try to enter a trade at.  

Targets:  The price your goal is at.  

Stops: The price at which you will exit a trade if it is going against you. In our system this is nearly always .20 (20 cents) from our entry level.  Swing trades and Special Situations are normally .50 (50 cents).

How to obtain Support and Resistance from Charts.

Now, let's take the a stock, in this example we will use  KLAC, and see what the chart says.

Based on the chart above we can identify support and resistance levels for KLAC.  First, we need to identify the high and the low seen in the chart. An interval of 1 hour is usually fine to determine support and resistance using the software.  As seen here,  the low in KLAC is near 48.67 and the high is near 49.05.  We disregard the blip higher to 49.15 because it was a single trade (evidenced by the single line) and it was  probably a misquote. 

Next, we identify the Bollinger support and resistance levels.  The lower Bollinger band shows support at 48.65 and the upper Bollinger band identifies resistance at near 49.  The Bollinger bands tell us to expect accelerated moves if they are broken.  We can see the strong move experienced as the upper band was broken for example.  The bands do not represent exact support or resistance levels however, but they are usually close.

We now have the following information:

Based on this information we should take the extremities to help us find support and resistance.  That means that we should use 48.65 as support and we should use 49.05 as resistance.  If we are using these numbers to identify entry prices or stop prices it is usually ok to be a little lenient though because these numbers are not always exact.

Entry levels:

If you were looking to buy KLAC, choosing a price near support, or near 48.65, would be fine.  You do not need to get 48.65 exactly.

On the other hand if you were looking to short KLAC choosing a price near resistance, or near 49.05 would also be fine because you really shouldn't expect to get 49.05 exactly.

Targets:

If you were using these numbers to identify a target on a short position you would use a number near support, or near 48.65, but not necessarily 48.65 on the dot.  48.7 would be logical.

On the other hand if you were using these numbers to identify a target for a long position you would use a number near resistance levels, or near 49.05, but not exact.  Close to 49 would be logical

Stops:

If you were using these number to identify a stop limit on a short position you would want to use something just beyond 49.05, the resistance level.   In this case 49.1 would seem logical.

On the other hand if you needed to establish a stop limit on a long position, it should be placed just beyond support, or just below 48.65.  In this example 48.6 would be logical.

Possible Trades:

From this information we can imagine 2 possible trades, one long, one short.  These are:

1.  Buy KLAC near 48.65 target near 49 stop 49.6.

2.  Short KLAC near 49.05 target near 48.7 stop 49.1.

How to use the Fibonacci Calculator.

This section references the Fibonacci Calculator we often use to identify support and resistance levels in conjunction with the charts.  This calculator is free to members of Stock Traders Daily also.  The calculator that we offer is very accurate at predicting support and resistance levels and everyone should learn how to use it.  You can open it from the Clubsite menu tab and choosing Fibonacci Calculator  from the menu.  We also advise that you review an educational chat that we had recently on Fibonacci Numbers to better understand them.   This archived chat session can be found by clicking on the archive link at the top of this page, selecting educational chats, and then selecting the chat titled 'Sup & Res using Fibonacci Numbers.'

Please review the snapshot of our calculator below and then read the discussion below that.

Notice the T1, T2, T3 levels offered in the calculator.  The left column represents support levels and the right represents resistance levels.

This calculator is telling us to expect strong support near 48.35 and to expect a decline all the way to 47.14 if that breaks.

It is also suggesting that strong resistance exists at 50.13 and that we should expect a surge to 51.28 if that level breaks.

If we chose to use the Fibonacci numbers to trade with we would be willing to do one of these 4 things:

1.  Buy KLAC near 48.35 with a target near 50.1 and a stop under 48.25.

2.  Short KLAC near 50.1 target 48.5 stop 50.27.

3.  Short KLAC if it breaks 48.25 with a target of 47.14 and a stop of 48.4

4.  Buy KLAC if it breaks 50.27 target 51.28 and a stop of under 50.

Now in this example we are using the same mentality as we did in the charts by being forgiving in our entry levels, targets, and stops.  In addition though we have extended the stops a little farther to reflect the absolute highs and lows of the day.  In other words, we have support and resistance levels so close to the low and highs of the day that we might as well place any stops just below the lows of the day or just above the highs of the day depending on our trade.

Summary of what we have discussed thus far.

Your Turn.  Try the following example.

Try to do it in the chart below for NVDA.  Note the high of the day  was 83.9 and the low was 81.3 at the time this chart was made.  

Identify 1:  Support and resistance levels using the chart.
Identify 2:  Support and resistance levels using the Fibonacci Calculator.  

Scroll to the bottom of this page for answers

The Answer is:

Chart support = 82.5

Chart resistance = 83.5

Fibonacci Support = 80.71

Fibonacci Resistance = 84.39