Fibonacci Retracement

By Kin Talk on Saturday, December 28, 2013 with 1 comment

When there is a trending market, the Fibonacci tool is the go to mechanism for traders. The way to trade during an uptrend is to go long (or buy) on a Fibonacci support level retracement. On the other hand, traders should typically go short (or sell) on a retracement at a Fibonacci resistance level in a downtrend.

These all-important retracement levels are found using the latest significant Swing Highs and Swing Lows. Click on the Swing High and drag the cursor to the most recent Swing Low when the market is trending down. When the market is trending up, click and drag the cursor from the Swing Low to the most recent Swing High.

The best way to get this strategy into your head is by looking at specific examples.

Market Trending Up

The image below is the daily chart for the AUD/USD.

We went ahead and plotted the Fibonacci retracement levels by clicking on the April 20 Swing Low at 0.6955 and dragging the cursor to the Swing High on June 3 at 0.8264. Once this done, the software will provide the retracement levels for your convenience.

The chart depicts these retracement levels at 7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0%), 0.7454 (61.8%), and 0.7263 (76.4%).

Traders now anticipate that the AUD/USD will retrace from the Swing High and find support at one of the Fibonacci levels shown. This is self-fulfilling as traders will be placing buy orders at these zones as price experiences a pull back.

The next chart shows what happens after the Swing High.

Price had a pull back through the 23.6% level and kept declining over the next two weeks. The 38.2% level was tested but not broken.

Anyway, the market resumed its uptrend later on. Around July 14 price broke through the Swing High. Apparently, if traders bought at the 38.2% level they could have made good money over the long-term.

Market Trending Down

Make use of the Fibonacci retracement tool in a downtrend as well. Let’s look at a 4-hour EUR/USD chart for more clarity.

It can be seen that the Swing High was found at 1.4195 on January 26. A week later on February 2, there was the Swing Low at the 1.3854 level. The retracement levels again can seen at 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).

During this trend, the projection is that if price were to retrace from the Swing Low, it would hit resistance at the Fibonacci levels highlighted. This is because traders are all set with sell orders at these levels.

Anyway, let’s see what happens next to the EUR/USD in this instance.

The market seemed to rally, but stalled under the 38.2% level slightly prior to testing the 50.0% area. So going in at the 38.2% or 50.0% level with some sell orders would have been the way to capitalize.

In these two instances, we notice that price found short-term support or resistance at Fibonacci retracement levels. This is caused by the large number of market participants who are using the Fibonacci tool.

Traders should exercise some caution when trading these levels as prices doesn’t always bounce at these points. The Fibonacci tool is no beginner tool and so traders have to be pretty careful with it. Nonetheless, good profits can be made if this tool is applied correctly.

Category: Technicals



Neha Agrawal said...
December 14, 2016 at 1:39 AM

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