4.23 Trading with Fibonacci Arcs
Fibonacci Arcs are nothing but an advanced version of Fibonacci retracements. While Fib retracement levels do not change with time, Fibonacci arcs factor the time element and hence the support and resistance levels defined by the arcs change with the time. Fibonacci arcs are in the shape of semi circles instead of horizontal lines.
Logic behind the Concept of Fibonacci Arcs
The Fib retracements remain flat irrespective of the momentum of the retracement. The logic behind the concept of Fibonacci arcs is that the length of the retracement is directly proportional to the momentum of the retracement i.e. the probability of reaching the expected Fibonacci retracement level gets lower with the time.
Let’s say during an uptrend we are working with the daily chart and the consolidation started a couple of days back. The momentum has been very slow and during the past couple of days and the price did not consolidate much. The hesitation indicated that the consolidation may not be much and a support may come up much sooner than the flat retracement levels drawn. Opposite of this may prove to be true during a downtrend..
Construction of Fibonacci arcs
Fibonacci arcs also have 38.2%, 50% and 61.8% retracement levels. However unlike Fibonacci retracements where the resistance or support levels are calculated by multiplying the "difference of the high and low" by Fibonacci ratios, the arcs are drawn as follows:
- During an uptrend the "High" as the center of the half circle and during a down trend the "low" as the center point.
- The radius is the distance between the center and the intersection points of the normal Fib retracement lines and the line joining the highs and lows.
The following diagram explains the construction of the Fibonacci arcs and it's difference with Fibonacci retracement levels:
As the above diagram shows, instead of flat horizontal levels, the support and resistance levels derived by these arcs curve up or down with time. A retracement during an uptrend will see the support levels curving upwards and during a downtrend the resistance levels would curve downwards.
Let's check the following two diagrams to see how Fib arcs differ from the Fib retracements during an uptrend and also during a downtrend.
Drawing the Fib Arcs on a Forex Chart
- Find the low and high point during a trend. Exactly same as Fibonacci retracements, you can make use of Swing Highs & Swing Lows, resistance & supports, trend-lines and candlestick reversal patterns to identify the zones where a retracement or consolidation is expected.
- Select the "Fibonacci Arcs" tool from the trend-lines on your chart.
- Click on the low during an uptrend and drag the cursor to the high and click there. During a downtrend you need to click on the high first before dragging the cursor to the low and clicking there.
- You will see half-circles drawn for 38.2%, 50% and 61.8% support arcs during uptrend and 38.2%, 50% and 61.8% resistance arcs during a downtrend.
Trading with Fibonacci Arcs
Trading with Fibonacci arcs is same as the normal retracement levels. When a consolidation takes place during an uptrend, the arcs tend to act as support levels and offer buying opportunities. Similarly when market corrects itself during a downtrend, Fibonacci arcs tend to act as resistance levels and offer entry zones for short-selling.
The following Forex chart illustrates the above:
Please also note that similar to any support and resistance levels, once a breakout takes place, the previous support zones tends to act as resistance zones and vice-versa.
- Introduction to Fibonacci Arcs