Fibonacci arcs are created by first drawing an invisible trendline between two points (usually the high and low in a given period), and then by drawing three curves that intersect this trendline at the key Fibonacci levels of 38.2%, 50% and 61.8%. Transaction decisions are made when the price of the asset crosses through these key levels.
Fibonacci arcs are one of the four most commonly used Fibonacci studies for analyzing markets in terms of support and resistance levels. They are used to draw circular arcs that are probable values of support and resistance based on a market range. Fibonacci arcs are generated by first finding the low and high prices for a given market. A line drawn between these two points becomes the radius in a large circle. Taking one point at 0% and the other as 100%, three arcs are then drawn across this radius at the Fibonacci percentages of 38.2%, 50%, and 61.8% of the total length of the line. The price levels at which the arcs intersect with a time index are, in theory, strong areas of support or resistance for the market.
Another popular strategy is to combine Fibonacci arcs with Fibonacci fans, drawing both studies on the same chart. Fans of this method consider the points where both studies cross to be extremely strong areas of support and resistance.
One caveat when using Fibonacci arcs: since the arcs are literally drawn as circles across a chart, the points of intersection can vary depending on the chart’s horizontal or vertical scale. A savvy trader will experiment with Fibonacci arcs applied to previous market data in order to determine a chart scale that seems the most effective, and then use that in future predictions of resistance and support.
With arcs, analysts choose a trend line between two extreme points in a price movement between a low and a high, and draw arcs across the chart at the levels of 38.2%, 50% and 61.8%. As a result, they plot all the potential support or resistance levels that are likely to occur over time in the future period that is graphed on the chart.