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Fibonacci Trading with the Retracement Levels/Ratios
The Fibonacci retracement indicator returns a value indicating whether there is a support or resistance near the current stock price. Five different retracement levels or numbers are used: 0%, 38.2%, 50%, 61.8% and 100%.
When calculating the Fibonacci retracement levels, if the highest stock value occurs before the lowest value, then this high value will correspond to the 0% level and the low value will correspond to the 100% level. When the opposite occurs (lowest stock price occurs before the highest stock price), then the high value will correspond to 100% Fibonacci level and the low value will correspond to the 0% level.
This Fibonacci trading indicator returns a value that ranges from 0 to 5, where zero means that there is no Fibonacci resistance or support close the stock price. A value of one means that 0% retracement level is near the current stock price, 2 for the 38.2% retracement ratio, 3 for the 50%, 4 for the 61.8% (Golden ratio) and 5 for the 100% ratio.
The Fibonacci retracement function or formula accepts two parameters. The first one is used to define the lookback period or the number of trading bars to use to calculate the Fibonacci retracement levels. The second parameter is a sensitivity value used to detect whether the stock, futures or currency price is near a resistance or support level (Fibonacci level) or not. The sensitivity value should not be the same for all stocks. Stocks with a high volatility and high share price should have bigger sensitivity value that stocks with a low volatility and a small share price.
Here are some examples using this Fibonacci trading indicator:
rule = Fibonacci_Levels(100, 1) == 3;
This trading rule generates a signal when the stock price is near the 50% Fibonacci retracement level.
rule = hhv(Fibonacci_Levels(100, ((hhv(100) - llv(100)) / 100)) > 0, 4) == 1;
This trading rule gives a signal if the stock price has hit any Fibonacci retracement level during the previous four trading bars.
In the above example, the sensitivity parameter is defined as the stock range for the previous 100 bars divided by 100.
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