Fibonacci spiral is created by drawing circular arcs connecting the opposite corners of squares in the Fibonacci tiling, thus the radius grows proportionally to the Fibonacci ratio.
The main principle of using the Fibonacci spiral in technical analysis is setting the first radius as the distance between two significant extremum points of the chart.
If this distance is chosen properly, intersections of the spiral and the price plot are said to mark important price and time targets.
Fibonacci spirals provide the optimal link between price and time analysis and are the answer to a long search for a solution to forecasting both time and price. Each point on a spiral manifests an optimal combination of price and time. Corrections and trend changes occur at all those prominent points where the Fibonacci spiral is touched on its growth path through price and time.
You will be astonished to see that if the correct center is chosen, Fibonacci spirals pinpoint turning points in the market with an accuracy seldom before seen.
Investing based on spirals is neither a black-box approach nor an overfitted computerized trading system. It is a simple universal geometrical law applied to different sorts of products such as futures, stock index futures, stocks, or cash currencies.
Unlike several of the other Fibonacci studies, the exact methods for calculating Fibonacci spirals are kept as something of a secret.
The basic idea behind the Fibonacci spiral is that a certain extreme point on a market chart is taken to be the center of the spiral, and then a Fibonacci spiral based on the golden ratio is drawn emanating out from that center.
Certain points along the spiral are then considered to be strong indicators of market events, such as price spikes or high levels of resistance or support.
The Advocates often tout the Fibonacci spiral as an extremely accurate method of predicting the behavior of a market based on both critical times and critical price levels, rather than simply on price levels.
Several pieces of software exist for calculating Fibonacci spirals on a computerized chart.
The secret nature of the calculations, however, makes it difficult for a prospective Fibonacci trader to assess the actual efficacy of the device.
In general, Fibonacci spirals are generated by picking a starting point and then increasing the width of points along the spiral from the center by multiplying the width by a Fibonacci ratio for every quarter turn.
In markets, this Fibonacci ratio would likely be determined by certain price levels within the market.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.