Fibonacci Arcs
Tue, Apr 15Fibonacci arcs are concentric circles drawn at the endpoint of a trendline, with their radii determined by Fibonacci ratios. Following an uptrend, these circles may represent support zones, while after a downtrend, they could indicate resistance zones.
To create Fibonacci arcs, one begins by drawing an invisible trendline between two points, typically the high and low of a specific period. Three curves are then drawn that intersect this trendline at the key Fibonacci levels of 38.2%, 50%, and 61.8%. Trading decisions are often made when the asset's price crosses these significant levels.
Fibonacci arcs are among the four most frequently utilized Fibonacci studies for market analysis regarding support and resistance levels. They help in drawing circular arcs that suggest potential support and resistance values based on market ranges.
The generation of Fibonacci arcs starts with identifying the low and high prices in a market. A line connecting these two points serves as the radius for a large circle. By designating one point as 0% and the other as 100%, three arcs are drawn across this radius at the Fibonacci percentages of 38.2%, 50%, and 61.8% of the total line length. The price levels where these arcs intersect with a time index are theoretically strong support or resistance areas for the market.
Another effective strategy involves combining Fibonacci arcs with Fibonacci fans, overlaying both studies on the same chart. Proponents of this method regard the intersection points of both studies as particularly strong support and resistance areas.
However, a key consideration when using Fibonacci arcs is that, since the arcs are drawn as circles on a chart, the intersection points can vary based on the chart's horizontal or vertical scale. A knowledgeable trader will test Fibonacci arcs against historical market data to find a chart scale that appears most effective, using this for future resistance and support predictions.
With arcs, analysts select a trend line between two extreme price points, from low to high, and draw arcs on the chart at the levels of 38.2%, 50%, and 61.8%. This process results in the plotting of all potential support or resistance levels that are likely to emerge over the future period represented on the chart.
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