Friday, October 19, 2012

Fibonacci Retracement

Fibonacci Retracement

Retracement trading is safer than breakout trading. The main levels to watch are:

38.2%, 50% 61.8% and 78.6% (or 76.4%)

The market will typically retrace after a strong move before continuing. The market won't always hit these levels exactly. For example, price may reverse mid way between 50% and 61.8% sometimes. Price can under shoot or over shoot a Fibonacci level. The 61.8% and 76.4% retracements are very popular levels for the market to retrace to. Watch these levels on the different timescales. It is the best to wait for a confirmation signal at or close to point C before entering a trade. The difficult part about trading Fibonacci retracements is knowing which level will hold.

For a buy, price should rise from a swing low at point A to a swing high at point B and retrace to point C at Fibonacci level. A swing low is a C bar turning point. The low of the middle bar is the lowest point of the swing.

For sell, price should drop from a swing high a point A to a swing low at point B and retrace up to point C. Look for intra day highs and lows, daily highs and lows, 2 day highs and lows and 3-5 day highs and lows, etc:

Candlestick patterns are most reliable near Fibonacci levels and other support and resistance lines. Candlestick are also good for signaling the end of  a retracement.

Double top and double bottoms often appear at Fibonacci levels e.g. 61.8% retracement or the 1.382% extension.

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