What Are Fibonacci Clusters?
A Fibonacci cluster is where a collection of Fibonacci retracements or extension levels, based on various price swings, convene near one price area.
The theory of a cluster is that if multiple Fibonacci extension or retracement levels are near one price, that price is likely to be an important support or resistance area. A trader could then potentially take a trade near that level.
Important Notes To Remember:
- A Fibonacci cluster is when multiple Fibonacci retracement or extension levels occur near one price area.
- Fibonacci clusters indicate the price could be an important support or resistance area, or turning point.
- Traders may opt to enter or exit trades around Fibonacci clusters.
Using Fibonacci Clusters
Fibonacci retracements and extensions are percentages of a price swing and are used to indicate areas of possible support or resistance that may occur in the future.
The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a Fibonacci ratio, 50% is also used.
If a trader were to draw the Fibonacci retracement tool on a price swing that went from $10 to $20, the 50% retracement would be $15, for example. This tool is used to indicate where the price may pull back to after making an upward or downward price move.
Fibonacci extensions project how far the price could move to the upside or downside following a pullback. Common Fibonacci extension levels are 61.8%, 100%, 161.8%, 200%, and 261.8%.
A trader may draw retracement and extension levels on various price swings. For example, they may draw a large one on a weekly chart, then draw some on the smaller daily and hourly price swings.
With multiple Fibonacci levels all over the chart, some will cluster together near a certain price. This Fibonacci cluster marks a potentially important area as a Fibonacci level from more than one price swing is saying that this area is likely to be support or resistance.
The trader may then use this cluster area to trade off of. If the price is in an overall downtrend and there is a Fibonacci cluster that says the price will stall out near a specific price on the next rally, the trader will watch to see if the price does in fact stall out at that level. Then, if the price starts to drop again, they enter a short position.
Limitation Of Fibonacci Clusters
Fibonacci clusters won’t always indicate important areas or turning points on the chart. Price will often disregard these levels entirely. Although, to the Fibonacci trader, this may provide information as it lets them know the price is moving toward the next Fibonacci level(s).
An argument against Fibonacci analysis is that with so many levels, especially when using multiple Fibonacci retracement or extension tools at the same time, the price is likely to turn near one of them. Only in hindsight is it clear which of the many levels shown on the chart actually turned out to be significant. This is why awaiting confirmation from the price is important.
How the Fibonacci levels are drawn is also subject to debate. Some traders draw them based on high and low points, while others draw them based on closing prices, or a combination of the above. This means traders may end up with clusters at a different price depending on how the tools are drawn.