The Fibonacci retracements pattern is a powerful tool used by technical traders to identify reversals on a stock chart. Let’s take a look at the Fibonacci sequence and show some examples of how you can identify this pattern.

Fibonacci numbers were developed by Leonardo Fibonacci and it is simply a series of numbers that when you add the previous numbers you come up with the next number in the sequence. Here is an example:

1, 2, 3, 5, 8, 13  - See how when you add 1 and 2 you get 3? Now add 2 and 3 and you get 5, and so on. So how does this sequence help you as a technical trader?

Stocks have a tendency to change direction when they come to the 50% and 61.2% levels. There are more level used in Fibonacci but these two are the most common and powerful to use.

To use the Fibonacci tool take the low point and high point of the move. If a stock has been bullish, place the tool at the bottom of the move and pull it to the top. This will give you your levels. You will also notice that the two levels of 50% and 61.8% will be support and resistance levels. This tool can be used on any time frame chart. Below is an example of the tool being used and how the stock reacts.

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