Using Fibonacci to Minimize Risk

By TheWild1 at 27 August, 2008, 6:25 pm, Categories : Financial Markets

As more tools and studies are being released, technical analysis is quickly becoming one of the most used methods to determining stock price movement. Technical analysis alone can be very vague. After all, there are millions of different ways to read a stock chart. I am going to show you one, right now.

Hopefully you already know why support and resistance are, in terms of the stock’s price. Essentially the support is a price where there seems to be something holding the stock from going down any lower. The resistance is exactly the opposite. Think of it like a ceiling. You may keep pounding away at it, but eventually with some force (or good volume in the stocks case) the stock will push through.

Support and resistance is a very common and easy tool to determine if you should even gain interest in a stock. It can generally be seen without any actual annotations on the chart.

Fibonacci

I am assuming this tool was named after the creator or something, but I really don’t care. Most people correlate fibonacci with retracement. By simply selecting the start and end point of the latest dominant trend, one can see if the stock has pulled back 31%, 50%, or 61%.

Lets quickly look at a couple examples:

A recently featured J.B. Hunt Transport Services, Inc (JBHT). I said it was on the verge of passing the 61% retracement line (marked as the top black dot in chart below). As we can see, the stock did not make it past that price point. So our buy point of $37.20 wasn’t reached and we didn’t lose any money!

jbht_082708

Now lets look at something that has panned out a little longer:

Google (GOOG) has been on a little roller coaster over the past year or so. Once the stock hit its high in the 700’s and then came tumbling down, it should of been time for people to pull out the fibonacci. As the stock seemed to have “bottomed out,” many thought the stock’s next rally was going to rocket right past $730.

Unfortunately it hit around the 61% retracement, which should of signalfied a warning. Google has yet to push past that level ever since.

goog_082708

There are several different ways to use Fibonacci or any type of technical analysis. It is up to you to see which one works best for you.

INO - Check out a free trend analysis for J.B. Hunt Transport Services, Inc and/or Google

Comments

Sam August 28, 2008

Wow…first time I heard Fibonacci was when my prof asked us to develop an application to simulate fibonacci series using C++ . Interesting to know it can be used in investment too.

Sam
Fix My Personal Finance
http://fixmypersonalfinance.com/

[Reply]

theWild1 August 28, 2008

Yeah that are a lot of things that I learned in my math and statistic classes that I didn’t expect to see with the stocks

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