How you can use Fibonacci Projection to find stock target price

Construction & working of Fibonacci Projection

Understanding the underlying formula used for the construction of Fibonacci Projection levels can help traders in taking a prudent decision while trading in complex scenarios. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

Fibonacci Ratios
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on.

The Fibonacci sequence starts from 0 1 and every number thereafter is built by the sum of the previous two. Every number in the Fibonacci sequence is 61.8 percent of the next number.

Fibonacci Projection

As with other Fibonacci studies, the key Fibonacci Projection levels are found by performing mathematical operations on the numbers in the Fibonacci summation series, and on the results of those operations. The same levels used in Fibonacci price extensions are used in Fibonacci Projections.

The application of Fibonacci projections differs from other studies as two price waves are required i.e. the initial wave and a completed wave in the counter direction. The Fibonacci price projection is then projected from the end of the counter-trend move. Figure 1. Calculations of Fibonacci Projection Points

To draw Fibonacci Projections we need to understand the main trend of the market. We will be using three price points to draw Fibonacci Projections.

For example, if the main trend is up and we have identified a swing low (A as shown in the picture below) and high (B as shown in pic below) of the uptrend and followed by a small correction(B-C below) of the above move (A-B). Most probably the length of the next upswing wave will be at a Fibonacci ratio. Figure 2. Construction of Fibonacci Projection Ratios

In the first picture above, during an uptrend, we have seen an up move from A to B then a correction towards C. Probable termination point of next up move can be drawn using Fibonacci ratios: 38.2 percent, 50 percent, 61.8 percent, 100 percent, 138.2 percent, 161.8 percent, 261.8 percent etc. from the starting point ‘C’. percent.

> The Fibonacci Projection is available on most trading platforms, such as Tradingview and MetaTrader. The Fibonacci Projection tool is also available on many free online charting sites, such as Investing.com, StockCharts.com and Yahoo! Finance.

> Fibonacci Projection levels are most frequently used to provide potential areas of interest.

> Unlike moving averages, Fibonacci Projection levels are static prices. They do not change. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection.

> The projection concept is also used in many indicators such as Tirone levels, Gartley patterns, Elliot Wave theory and more.

> Like all technical indicators, it is important to use the Fibonacci Projection in conjunction with other technical analysis tools.

Trading Technique

The Fibonacci Projection tool plots percentage retracement lines based upon the mathematical relationship within the Fibonacci sequence series. These ratios can be combined with other indicators and price patterns to create an overall strategy. One can use Fibonacci projection for profit booking purpose majorly. Figure 3. Fibonacci Projection & Targets

(The author is Head - Technical & Derivative Research at Narnolia Financial Advisors Ltd.)

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