Fibonacci arcs are half-spheres extending outward from the baseline, a line connecting a high and low. The radii of these arcs are based on Fibonacci ratios. After an upward trend, Fibonacci arcs might indicate support zones. On the other hand, they could signify the resistance zone after a downward trend.
To create them, one must first draw a line between the high and low, followed by sketching three curves that intersect with it at 38.2%, 50%, and 61.8%, the key Fibonacci levels. Investors make trading decisions when an asset’s price crosses through these levels. This arc is among the most common Fibonacci studies used for market analysis regarding support and resistance levels.
What is the formula for Fibonacci arcs?
The Fibonacci arc has no formula, although it is important to state that it intersects at 78.6%, 61.8%, 50%, 38.2%, and 23.6% of the baseline. However, most charting flows only show the intersection points as 38.2%, 50%, and 61.8%. Although these arcs are half circles, they can also be displayed as complete circles if necessary.
Nothing is needed to calculate Fibonacci arcs. Charting software is responsible for drawing them on behalf of traders. Unlike other tools such as Fibonacci retracement, which are more straightforward, Fibonacci arcs can be somewhat confusing to understand. So, even though there is no formula, there are a few key points to consider when drawing the arcs. It is in your best interest to follow these guidelines.
- You should draw the Fibonacci arcs in the opposite direction whenever any upswing occurs. You will start from the swing high and plot towards the swing low.
- The Fibonacci arcs will be plotted automatically once you connect the two main points. Depending on the charting platform you’re using and the type of trading, you’ll be able to form the levels.
- Deciding on the Fibonacci levels to use is a personal choice. Some traders prefer to use all of them, from 23.65 up to 78.65. However, it is necessary to point out that using too many levels can really clutter your chart. That will make it harder to deduce anything.
- Once your arcs are set up, it is possible to predict when the price will back-pedal. Even if this is still not possible, you’ll at least tell the point where it will touch one of these Fibonacci arcs.
- The Fibonacci arcs forecast into the future. So it can act as a guide when you’re trying to come up with a rough estimate of the time the price will test one of the arcs.
With this list, you can pursue the general Fibonacci rules. Based on whether the retracement succeeds or not, traders can then trade in the reversal’s direction or the previous swing wave’s retracement. It is also better to use Fibonacci arcs with another tool rather than using them in isolation. That is because they are only possible support and resistance levels with the added time factor.
What is the difference between a Fibonacci arc and a Fibonacci retracement?
Fibonacci retracements align with the Fibonacci arcs at the intersection points in the baseline. If you draw these two using the same baseline, there will be an alignment of the retracement level at the arc and baseline intersection.
Retracements are horizontal levels; hence they can remain fixed over a given period. In contrast, Fibonacci arcs only occur at the intersection point once. They will move based on the arc’s radius over time. Arc levels are active, while retracement levels are static.
Drawbacks of Fibonacci arcs
Fibonacci arcs have some limitations of their own. Firstly, it is unlikely for the price to respect a Fibonacci arc level’s exact price. Therefore, placing a purchase order at one of the different pullback levels will not be a practical strategy.
Another drawback to arcs is that plotting arcs is also somewhat subjective. If different people connect varying highs and lows, they are likely to get different arcs. If these arcs are being used for trading, the results will vary, sometimes dramatically. This fact alone makes testing Fibonacci arcs a rather tricky strategy.
Because of the mentioned limitations, traders generally use Fibonacci arcs as confirmation or analysis tools rather than using them to provide trade triggers.
Conclusion
Fibonacci arcs are a riveting chart overlay since they take both price and time into account. It would be best to use them as an analysis or confirmation type tool to highlight areas that will probably provide resistance or support. In case you get a trade signal from the strategy, and it occurs around one of the arcs, then it is possible for the Fibonacci arcs to confirm this signal. Like other annotation tools, avoid using arcs as a standalone system. Also, remember to test and practice using an indicator before using arcs with real capital. It will prevent any unnecessary and significant losses since you are just starting.
