Fibonacci RetracementTechnical Analysis
Fibonacci Retracement are based on the Fibonacci Number Sequence. It is used to find potential (but not definite) support and resistance levels during a retracement of a trend. The Fibonacci sequence is a number series where each number is the sum of the previous two numbers before it: 1+1+2+3+5+8+13… and so on.
Numbers within the sequence are approximately 1.618 times the preceding number, and approximately 0.618 times the following number. The 0.618 number is referred to as the golden ratio. The ratio of 0.382 is found by dividing any number by the number 2 places to the right in the series. The inverse number is 2.618. The ratio of 0.236 is found by dividing any number in the series by number approximately 3 places to the right, and the inverse number is 4.236. The ratios 0.786 and 1.272 are respectively the square roots of the numbers 0.618 and the number 1.618. Together these numbers create all the Fibonacci Retracement numbers. Fibonacci numbers are useful mostly because other traders use them as support and resistance points.
The most widely used fibonacci retracement levels are 0.382 and 0.618. The 0.786 and 0.50 levels are also considered primary possibilities. The most widely used expansion levels are 1.618 and 2.618.
Fibonacci lines have varying levels of strength. A 0.236 line is a very weak line, it typically bounces only in really strong trends. The 0.382 is an important line of support or resistance. If broken, a retracement typically strengthens. The 0.50 line is a common retracement line based on Dow Theory. A 0.618 line is the “golden ratio” line, strongest typical line for pullbacks and reversals. The 0.786 line is the first deeper retracement. The 0.886 is the second-deep retracement level. The 1.0 line is the last possible line while still remaining a retracement. This is typically used for double tops/bottoms or breakouts. If a retracement passes the 1.0 line, chances are you are dealing with a trend reversal. All of these numbers should be added to a Fibonacci Retracement settings, and color coded to reveal the differences.
Adding targets to your Fibonacci retracements is also a wise idea. Commonly, targets are -0.382, -0.618, -1.618, and -2.618. Adding -88.6 is also reasonable. There’s no guarantee these targets will be hit but they often are in eventually. It is simpler to add them to your Fibonacci Retracement tool settings than drawing them separately.
When using retracements, the primarily goal is finding new positions by entering on swing lows or swing highs at a Fibonacci Retracement level. Expansion levels are used as take profit targets or take risky new positions.
Fibonacci Retracements are always drawn from past to present (or left to right). Never draw from present into past. To draw Fibonacci, you need a completed swing: both a swing low and swing high. If drawing from a low point to a high point, start at a swing low and draw the Fibonacci Retracement Tool upwards to the next swing high. If drawing from a high point to a low point, start at the swing high and draw the Fibonacci Retracement Tool downwards to the next swing low. Always include all price action, with the candle wicks!
If looking at a monthly or weekly timeframe and don’t see swings within a trend, just rising or falling bars, move one time frame lower. You’re more likely swings on daily or four-hour chart timeframes. You will see swing in the greater trend there. Do not move too far below the trend time frame and always base your trade sizing and risk controls on the Structure Timeframe. If trading intermediate time frames, we’ll use Weekly (Trend Timeframe), Daily (Structure Timeframe), and Four-Hour (Entry Timeframe) charts. You shouldn’t be dipping below the four-hour chart timeframe for drawing Fibonacci or hunting confluences.
Entry triggers require a swing low at a confluence of structure, Fibonacci, and indicators used. A swing low will be needed at confluences in Fibonacci Retracements drawn from swing lows to swing high. A swing high will be needed at confluences in Fibonacci Retracements drawn from Swing Highs to Swing Lows. The completed formation of a swing high or swing low at confluences confirms your entry.
Trading Fibonacci Confluences
We are never certain where price will react. We do know that price has higher chances of reacting at (or near) Fibonacci levels. In order to choose highly likely reactions levels, use “confluences” at the technical level that are in line with our economic, fundamental, and sentiment bias. We then ensure those levels work with our risk management requirements. Selecting confluence levels in line with bias minimizes our risk of making a bad directional trade and minimizes our risk of making trades with poor risk metrics. We do not trade if we don’t find a confluent technical trade inside of our risk limitations. The trades we do take must also be in line with our economic, fundamental, and sentiment bias. This makes sure that we have a high probability of being right. We’re paid to be right, not to be in any trade possible. When we enter confluent trades and we’re wrong, we either get stopped out and lose a small percent of our accounts or we immediately exit quickly to avoid losses. Remember:
If you can’t be right, be liquid!
When looking for a confluence zone, we need a place two or more structure points or indicators create a convergence where we want to enter a trade. More is better. The higher the amount of confluences creating a confluent zone, the more certain the trade. We look for intersections in the following: Fibonacci, Trendlines, Support, Resistance, Channels, Patterns, Indicator Signals, and Divergences. Two Fibonacci can also provide points of confluence, like an old Fibonacci and a recent Fibonacci. A higher timeframe Fibonacci and a lower timeframe Fibonacci or a Fibonacci drawn from low to high and a second Fibonacci drawn from high to low.
We only do what our biases and price action lets us do. Find high chance reversal or breakout areas, if the trigger forms that happens according to bias, act. This requires interpretation and drawing chart structure accurately.
The reason confluent zones are special is their combination of multiple elements that other traders are using. Price will react if other traders they are looking at the same Price Action, Trendlines, Patterns, Fibonacci, Support, Resist, and Indicators. It only needs to be the same direction as our aligned bias.
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