Trade stocks with high volume and some volatility because we need to make a living, but don't feel like you must trade with the other gunslingers. The two green circles on the chart highlight the moments when the price bounces from the Then when it started following the downtrend to go down once again, you could go short. In doing so, he popularized the use of Hindu-Arabic numerals in Europe. Please note that when the market is too slow, sometimes breakouts have no meaning and they just make a new high or low, and then the market keeps on moving sideways. Fibonacci retracement levels are used by many retail and floor traders, therefore whether you trade using them or not, you should at least be aware of their existence. To do this, you need to know the other two critical levels -
However, the Fibonacci studies do not provide a magic solution for traders. Rather, they were created by the human mind in an attempt to dispel uncertainty. Therefore, they shouldn't serve as the basis for one's trading decisions. Most often, Fibonacci studies work when no real market-driving forces are present in the market.
Fibonacci Settings For Trading
They are also so helpful in setting the stop loss and target orders. To use the Fibonacci numbers on the charts, you have to find the top and the bottom of the previous trend.
You have to wait for the trend to become matured. Please follow the red numbers on the below chart:. The price that started going down on 23 Nov , touched the This level worked as a support, and so the price went up as soon as it touched the level, but then went down to retest the As you know, usually when the price cannot break a support or resistance, it tries again and again and sometimes it can succeed to break out of the level.
So the price went up, but tried to test the It touched the On 31 Dec it went down to retest the On 2 Jan it failed and went up. Currently 17 Jan it is retesting the If not, it will go up, or sideways. While going up, the price tested the From 26 Aug to 1 Oct , price went up and down between the During this period of time, the It made a consolidation around the It had a hard time in breaking the It tried for ten days from 5 to 16 Oct to break the On 31 Oct , it reached the The price went much lower after it failed to break above the On 9 Nov it broke below the As you know, consolidations including, triangles, wedges, pennants and channels are continuation patterns.
It means the price usually follows the same direction that it was following before the consolidation forms. Why do Fibonacci levels have such a strong impact on the markets. Why does the price become stopped sometimes for several days below or above the Fibonacci levels? Of course if you use the Fibonacci levels in the bigger time frames like weekly and monthly charts, you will see that sometimes the price becomes stopped by one of the Fibonacci levels for several weeks or months.
I mean whether you know the reason or not, you can use Fibonacci levels in your trades. Prices go up and down because of the behavior of traders: It depends on your trading system. You can use Fibonacci levels in all time frames. As I already explained, Fibonacci levels act as support and resistance levels. So when the price is going up and you have already taken a long position you have bought , you should be careful when the price becomes close to one of the Fibonacci levels.
It is possible that it goes down and you lose the profit you have already made. So you have to move your stop loss to the open price of the first candlestick that is touching the Fibonacci level or a little higher. It depends on the length of the candlestick. You can take a new position then.
It is the same as when the price is going down, but in this case Fibonacci levels act as support. If you get ready for all these possibilities, you will not be trapped. You have to treat the Fibonacci levels as the real support and resistance levels. They really have no difference and sometimes the price reacts to them very strongly. Fibonacci numbers really work in forex trading because they reflect the psychology of the traders.
Trading forex or stocks is all about knowing the psychology of the traders: When most traders sell, the price goes down and when they buy, the price goes up. How can we know when traders decide to buy or sell? Fibonacci numbers are one of the tools that reflect what traders may have in their minds. They can not find the start and the stop points for plotting the Fibonacci levels. They choose the wrong points to plot the Fibonacci levels and this causes them to make mistakes. One of the best places to plot the Fibonacci levels, is the resistance and support of the ranging markets.
We can see the ranging or sideways markets on all different time frames. A range, long or short, will be broken finally because the market cannot stay in an indecision situation forever. A range can be broken down or up, and this is what we want to know to take our positions and follow the markets. If you are a Fibonacci trader, all you need is finding a range on one of the time frames and then finding the high and low of the range.
Let me show you some examples. Please follow the notes on the image below as you are reading these explanations. The distance between high and low of this range was over pips. It was still tradable but obviously the market was not trending.
Almost on January , we could not guess that we are at the beginning of ranging market, but when the price went down on Then, when the price went up and made a high at 2. On a ranging market, chart patterns like triangle, wedge or even head and shoulders can form. If the price breaks above the range, an uptrend will form, and visa versa.
On the below chart, the price tested the 1. So, this can be considered as a signal that the range would be broken down. However, we should always wait for a real breakout:. Almost all of the signs higher lows tell us that the range should be broken down. We have to wait until the breakout occurs.
When the support of the range is broken, we can go short and when the resistance is broken, we can go long. The signals indicated that the price would break below the range. Therefore, I plotted the Fibonacci levels from the low of the range to the top.
Also, all other These numbers are called the Fibonacci Extensions:. Please follow the below chart. We could go short at the close of this candlestick if we were not already short after the formation of the Our target would be the The stop loss has to be placed above the open of this candlestick.
When the price breakouts out of a range, the If the breakout is strong enough, the Among the Fibonacci retracement levels or the levels that are placed between zero and , the Before this lower high, we have a smaller lower high which is formed below the Do you see how exactly and precisely the Fibonacci levels work?
As you see the below image when the price reached the It is time to emphasize on the importance of On the below chart, the price goes up and retests the Again when the price broke down the Because it is a bearish candlestick that closed below the low and the close of the last 5 candles.
It also has covered the whole bodies and shadows of the last three candles and have formed a bearish pattern which is called Dark Cloud Cover.
This downtrend could be traded differently as well. For an upward move, the tool is applied from the bottom and ending at the top — again it is always applied from left to right. The following demonstrates this on a chart:. As you can see in the charts above, after the Fibonacci tool has been applied, it automatically places the Fibonacci levels between the start and the end of the move.
These levels are referred to as retracement levels. Fibonacci levels are shown as percentages of that total move. This then acts as support or resistance, depending on which way the trend is. In the chart below you can see the These are commonly used levels that the price could retrace back to, although there are other retracement levels that have been identified and work well.
As you can see from the chart below, the Fibonacci tool was applied to an uptrend and the As these are levels that the price could retrace back to, you can then use them for potential entries. You could enter at each retracement level placing a stop loss on the other side of the Fibonacci level. If your stop loss is hit, you simply enter again at the next level and carry on until the price goes back in your favour. This is an aggressive way of finding entries using the Fibonacci tool.
Wait until the price finds support or resistance at these levels first, and then enter. You wait until the price finds support or resistance at these levels, wait for the price to move back in the original direction of the trend and then enter.
It is important to note that Fibonacci is not a trading system in itself — it has to be used in conjunction with or as part of a trading system. The Fibonacci tool is not only used to establish the retracement levels for traders as support or resistance; it can also project extension levels that show where the price could go to. Fibonacci extensions can therefore be used for profit taking or even counter trend entries.
The most common extension levels used by traders are the The following is an example of extension levels in a downtrend. The Fibonacci tool can be used to enter a position at one of the retracement levels when the price pulls back and then exit at one of the extension levels.
Below is a chart showing the extension levels of the Fibonacci tool applied to an uptrend. You can see the retracement and extensions levels. The extension levels can be matched to the corresponding retracement levels to maximise profitability. For example, if the price retraced to the The answer comes back to a self-fulfilling prophecy. Banks and large financial institutions will look to take their profit at some point and targeting a Fibonacci extension level is one method they use.
There is no way around it, you will have blowup trades. I do not care how good you are, at some point the market will bite you. To this point, have a max stop loss figure in mind. Since I trade lower volatility stocks, this may occur only once or twice a year. Breakout trades have one of the highest failure rates in trading. I'm going to give you a few things you can do to up the chances of things working out. Therefore, you want to make sure as the stock is approaching the breakout level, it has not retraced more than This will increase the odds the stock is set to go higher.
In terms of where things can go wrong, it's the same as we mentioned for pullback trades. The one difference is you are exposed to more risk because the stock could have a deeper retracement, since you are buying at the peak or selling at the low. So, to mitigate this risk, you will need to use the same mitigation tactics as mentioned for pullback trades. You can use Fibonacci as a complimentary method with your indicator of choice.
Just be careful you do not end up with a spaghetti chart. Here we will try to match the moments when the price interacts with important Fibonacci levels in conjunction with MACD crosses to identify an entry point.
The two green circles on the chart highlight the moments when the price bounces from the When we get these two signals, we will open positions. When the alligator lines overlap, the alligator falls asleep and we exit our position. The price drops to the Meanwhile, the stochastic gives an oversold signal as shown in the other green circle. This is exactly what we need when the price hits A few hours later, the price starts moving in our favor.
At the same time, the alligator begins eating! We hold our position until the alligator stops eating. This happens in the red circle on the chart and we exit our long position.
I saved this one for last because it's my favorite go to with Fibonacci. Volume is honestly the one technical indicator even fundamentalist are aware of. I mention this a little later in the article when it comes to trading during lunch, but this method works really during any time of the day.
As a trader when you see price coming into a Fibonacci support area the biggest clue you can look to is volume to see if that support will hold. Notice how in the above chart the stock had a number of spikes higher in volume on the move up, but the pullback to support at the This does not mean people are not interested in the stock, it means that there are fewer sellers pushing the price lower.
This is where longs come in and accumulate shares in anticipation for the rally higher. Fibonacci Arcs are used to analyze the speed and strength of reversals or corrective movements. To install arcs on your chart you measure the bottom and the top of the trend with the arcs tool.
The arcs appear as half circles under your trend, which are the levels of the arcs distance from the top of the trend with Each of the Fibonacci arcs is a psychological level where the price might find support or resistance.
I have placed Fibonacci arcs on a bullish trend of Apple. The arc we are interested in is portrays As you see, when the price starts a reversal, it goes all the way to the This is the moment where we should go long.
Fibonacci time zones are based on the length of time a move should take to complete, before a change in trend. You need to pick a recent swing low or high as your starting point and the indicator will plot out the additional points based on the Fibonacci series. Do you remember when we said that Fibonacci ratios also refer to human psychology? This also applies to time as well. The main rub I have with Fibonacci trading is you begin to expect certain things to happen.
For example, if you see an extension as the price target, you can become so locked on that figure you are unable to close the trade waiting for bigger profits. If you are trading pullbacks, you may expect things to bounce only for the stock to head much lower without looking back. Take that in for a second. That is quite a bit of times where you will be wrong. This means it is absolutely critical you use proper money management techniques to ensure you protect your capital when things go wrong.
The other scenario is where you set your profit target at the next Fibonacci level up, only to see the stock explode right through this resistance.
About Andrew Thrasher, CMT
If you draw Fibonacci levels on it (like what I did), you will see how Fibonacci numbers, specially the , work. They say ratio can be seen in everything in our body in internal and external organs. How to Use the Fibonacci Numbers in Forex Trading? Fibonacci trading is not complicated. I believe the major reason certain Fibonacci levels do work is because so many traders swear by, and use them constantly. So if a major Fibonacci level is identified on a higher timeframe chart, you can be sure that a large number of traders will be watching that level, many of them having existing orders around that point. Apr 04, · You did not explain very well, it does work, as do ALL retracements, SOME of the time, my statement claims that there is no statistical evidence that a Fibonacci retracement is any more significant that any other ratio of retracement you wish to trade eg arithmetic retracement of 25%, 50% and 75 %.