The Invezz Fibonacci calculator helps you determine where to draw horizontal lines on a stock chart to signal potential areas of support or resistance for the stock you own. Read on to learn how our Fibonacci calculator works, and how it can help your investing strategy.
How to use our Fibonacci calculator
Using our Fibonacci sequence calculator means following these steps:
- First, you’ll want to calculate where Fibonacci lines should be drawn for a stock that’s in an uptrend. To do so, first key in the highest point that the stock you own has reached during its current uptrend.
- Next, key in the lowest point that the stock has reached during its current uptrend.
- If desired, you may also key in a custom price point during the stock’s uptrend.
- Hit calculate, and you will see the specific price points at which that stock’s support and resistance levels could come into play; these are also called Fibonacci replacement levels. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6% removed from the original price that you punch in, so that’s where the lines would be drawn. (Fibonacci calculators also often use the 50% mark from a price point as a place to draw a retracement line, even though 50% is not an official number on the Fibonacci scale.)
- To calculate where Fibonacci lines should be drawn for a stock that’s in a downtrend is the same idea. Key in the highest and lowest points that the stock has hit during its current downtrend, plus a custom price point if desired.
How the Fibonacci calculator works
The calculator works by using the Fibonacci sequence to work out where support and resistance lines are likely to fall on stock charts. Let’s say you buy a stock at £100 per share. The first retracement level on the Fibonacci scale is at 23.6% from the original price. That means that you would draw a line indicating a potential level of support 23.6% below your purchase price, which in this case would be at £76.40. You can do the same thing for a potential level of resistance, drawing a line at £123.60.
Why should I use it?
To hone your investment strategy. Fibonacci numbers pop up everywhere in life and in nature. As a result, some traders (of stocks, cryptocurrencies, and other assets) believe that Fibonacci numbers can be highly relevant when investing too.
Moreover, estimating where support and resistance levels may lie can give you a better idea of how to react when a stock starts moving in one direction or another. For instance, if your goal is to make a profit of about 20% and your stock starts approaching that 23.6% level in its uptrend, that might be a good time to sell your entire position, or at least take some profits.
What is the Fibonacci sequence and how is it relevant to investing?
The Fibonacci sequence is a set of numbers in which each is the product of the previous two added together (1,1,2,3,5,8,13,21,34…). These numbers crop up all over the world and are central to the mathematical equations used by investors to determine the likely movement of a stock’s price, and when a stock uptrend or downtrend might be coming to an end.
A stock uptrend occurs when shares of a company you own start heading higher. All uptrends (and downtrends) are by definition temporary. That means that using a Fibonacci calculator can help you figure out where potential points of support and resistance lie; if those levels get violated on either the upside or downside, it could be a sign that the stock’s uptrend or downtrend is over.