Fibonacci levels are a staple in my trading, intraday and end-of-day. After I identify the major and minor trendlines and recent minor lows and highs, I draw my Fibonacci levels using one of two tools:

	Fibonacci Retracement
	Fibonacci Extension

Unfortunately, Fibonacci levels are a cause of confusion for far too many traders. Either they don't know how to draw them, or they don't know what to do with them once they have drawn them. If you think of Fibonacci levels as support and resistance, you have taken a huge step forward in simplifying their active role in your charts.

So let's discuss Fibonacci retracements. Drawing them can be very easy once you understand the role of minor highs and lows because it is from these highs and lows that you will draw your retracement.

Minor lows and highs are simply points at which prices change direction. A minor high is established when the current high has a lower high before and after it. A minor low, then, is established when the current low has a higher low before and after it. (Please see "Using Minor Lows and Minor Highs to Pinpoint Reversals" on the eSignal website.)

It is these highs and lows that will give us a guideline as to where to begin drawing the starting and ending points of the Fibonacci retracement. We are looking for the "last major move," which is typically the most recent rally or sell-off. Fibonacci retracements are used to measure the bounce or pull-back from the "last major move."

The subsequent chart is an example of a Fibonacci retracement in the Eurodollar FX market. The starting point where the Fibonacci tool begins is marked with an "A" and the ending point with a "B". The subsequent levels that are calculated are the retracement levels. The levels represent potential reversal areas. Think of them as support and resistance because that's what they truly are.

As you can see: The .786 level at 1.24745 was indeed support — and prices reversed. In this example, the best way to use these Fibonacci retracements is to assume that any of the levels could be where prices find support and that we should pay extra attention to them.

What we now have is a series of predictable "alert levels" where, instead of having to randomly guess at what point we should set stop loss orders or profit targets, we can pinpoint what these levels are and implement them into our trading plan before even placing an order.

Risk-to-reward ratios can be planned with levels that have a basis in price action…

Trendline breakouts can be confirmed with Fibonacci price levels…

Entries and exits can be measured within an established trend…

This is how easy it is to use eSignal's Fibonacci retracement tool, yet the real-world applications are powerful and accurate.

When learning how to draw Fibonacci retracement levels, traders often have questions as to where to draw the levels. I hope I have addressed those questions effectively here. However, there are also issues of when to draw new levels when price action has established new minor highs and lows.

With eSignal Formula Script (EFS) studies, you can automate Fibonacci levels. So, now, instead of fighting with whether the levels you used are correct or whether you must draw new ones, you can let EFS studies handle it for you. (eSignal users can go to eSignal File Share on esignalcentral.com and click on the 4th link under "Editor's Picks" [EFS Database] to find, not just Fibonacci levels, but other useful EFS files for use in their eSignal charts.)

I encourage all eSignal users to understand just how powerful the EFS studies can be. Learn to use these automated tools and make them a regular part of your charting analysis.

*Reprinted (and modified) with permission from Raghee Horner