Investment analysts sometimes use Fib projections, or Fibonacci projections, to estimate where a current move in a financial instrument's price might end. Fibonacci theory is centered around the numbers "38.2," "50" and "61.8" percent; market prices frequently pull back by those percentages, and the particular percentage that is achieved is predictive of what the stock will do next. After a stock has pulled back, you can use Fibonacci numbers to predict the magnitude of the next price surge. Future surges in trends sometimes occur in moves of 61.8, 100 or 161.8 percent of the previous move in the trend.
Identify a trending stock for which you would like to project the size of its next price move. For example, consider a stock, Stock X, that surged from $20 to $23 last week and has since pulled back to $21.5. Now it appears to be on the rise again. Where will the next move end?
Calculate the magnitude of the first move by subtracting its starting price from its ending price. Stock X example: $23 - $20 = $3
Identify where the next move has started. Stock X pulled back to $21.50 before it started to rise again, so the next move has started at $21.50.
Calculate the potential sizes of the next move using the Fibonacci projection percentages. Calculation 1: 61.8 percent of $3 = 0.618 x $3 = $1.85 Calculation 2: 100 percent of $3 = 1 x $3 = $3 Calculation 3: 161.8 percent of $3 = 1.618 x $3 = $4.85
Add each of the previous projection calculations to the price at which the stock's new move is starting. Remember that Stock X pulled back to $21.50, so: Projection 1: $21.50 + $1.85 = $23.35 Projection 2: $21.50 + $3 = $24.50 Projection 3: $21.50 + $4.85 = $26.35 According to Fibonacci Theory, these three values represent likely prices where Stock X's next move will end.
Timothy Banas has a master's degree in biophysics and was a high school science teacher in Chicago for seven years. He has since been working as a trading systems analyst, standardized test item developer, and freelance writer. As a freelancer, he has written articles on everything from personal finances to computer technology.