ChartAlert 25.2.1 now includes logarithmic versions of Fibonacci Retracement and Fibonacci Extension. This feature was added based on user requests.
What is Fibonacci Retracement in Technical Analysis?
Fibonacci Retracement is a popular tool in technical analysis that helps traders identify potential support and resistance levels. It is based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding ones.
In trading, key Fibonacci ratios like 23.6%, 38.2%, 50%, 61.8%, and 78.6% are used to predict price reversals. Traders draw Fibonacci retracement lines by connecting a significant high and low on a price chart. These lines indicate areas where the price might pause, reverse, or continue its trend.
Also see:
Fibonacci Retracement Levels in trading
Drawing – Fibonacci and Gann (Line) Studies
Fibonacci Toolbar (Line Studies)
Understanding Logarithmic Fibonacci Retracement
While Fibonacci Retracement works well in many scenarios, its effectiveness can be limited when analyzing price movements on digital screens.
One of the main disadvantages of digital screens is that they compress large price ranges into small spaces. This cramping distorts the visual representation of price movements, especially for assets with significant price fluctuations over time. As a result, the traditional Fibonacci levels may not accurately reflect the true dynamics of price changes, making it harder for traders to identify meaningful support and resistance levels.
In contrast, using actual logarithmic graph paper or canvas offers distinct advantages.
Logarithmic scales spread out price data more proportionally, giving equal weight to percentage changes rather than absolute price changes. This approach helps visualize price movements more clearly, especially for assets that have experienced exponential growth or decline.
On a logarithmic canvas, price trends and retracement levels appear more natural, making it easier to spot patterns and make informed trading decisions.
The concept of Logarithmic Fibonacci Retracement takes this a step further. Instead of relying on the actual prices of an asset, this method converts price values into x and y coordinates on a logarithmic graph. Fibonacci levels are then calculated based on these coordinates rather than raw price data.
This means that if the y-axis on the canvas changes — for example, if the scale is adjusted — the Fibonacci levels will also shift accordingly. This dynamic adjustment ensures that retracement levels remain relevant regardless of changes in scale, providing a more flexible and accurate tool for technical analysis.
By using Logarithmic Fibonacci Retracement, traders can overcome the limitations of traditional Fibonacci analysis on digital screens.
It offers a more precise way to analyze price movements, especially in volatile markets, and helps traders make better decisions based on clearer, more proportionate data.
Traditional vs. Logarithmic Fibonacci Retracement
Let’s look at a simple example to understand the difference.
Traditional Fibonacci Retracement (Image A)
We apply a Fibonacci Retracement from a high of 176.90 to a low of 31.05 on the stock symbol ‘ATUL’.
If the stock moves above 176.90, we expect it to reach higher Fibonacci levels like 161.8% and 261.8%, corresponding to prices of 267.04 and 412.89.
But what happens when the price exceeds 648.87 (423.6%) and even reaches 1031.16? We run out of meaningful Fibonacci levels, limiting our analysis.
Logarithmic Fibonacci Retracement (Image B)
Here, we convert the price levels as if plotted on logarithmic graph paper. This changes the 161.8% and 261.8% levels to 517.24 and 2941.79, providing a broader range for analysis even when the price moves significantly higher.
However, using a logarithmic canvas has its quirks:
Impact of Changing the Canvas (Image C)
When we adjust the canvas by adding extra space above the price chart, either by:
1. Dragging the y-axis down near the top of the chart, or
2. Double-clicking the y-axis to adjust price levels manually,
we notice changes. The Fibonacci levels shift slightly — 161.8% and 261.8% become 521.27 and 2968.78, respectively. This happens because the calculations depend on the canvas scale.
In conclusion, while the price levels shift with canvas changes, they remain within a narrow range. Thus, Logarithmic Fibonacci Retracement offers more flexibility and better adapts to large price movements, making it a powerful tool for technical analysis.