Fibonacci Retracement trading tool
Many people feel discouraged when thinking about the Fibonacci retracement trading strategy, but I am here to tell you that it is not so complicated, I am here to give you a detailed explanation that anyone can use.
The Fibonacci retracement trading strategy will help beginners to understand the Fibonacci levels and how they can help you know the best entry and exit point for your trades.
This strategy
helps traders to accurately pick price points to set up their trade entries,
take profit points, and even price points to place a stop-loss.
What
is Retracement trading?
Retracement trading is
a trading method whereby a brief price correction occurs during a longer-term
upward or downward trend. These price corrections are temporary price reversals
and do not indicate a change in the direction of the larger trend.
Finding and practicing retracement trading is a method technical analysts use for short-term trades.
The key advantage of retracement trading is that they present a chance to make a profit by opening a position in the trend's original direction at a better price right before the move continues.
Why
do Retracements Occur?
I will illustrate with an example. Assuming we're talking about a large upward trend. As a large number of traders begin to buy, they do so with the expectation that the market price would rise.
This automatically pushes the market higher and as more traders notice the movement they start buying as well. When the movement has gained traction, some traders will close their position to take profit and this may result in a temporary sell-off and the market will pull back and the upward momentum will be suspended.
After this, the original forces that form the trend resumed their activity and the price continues to rise until the trend has run its course and reversed.
So
how would you enter your trade-in a retracement?
The first thing you
need to do is find a strong upward or downward movement of a given financial
instrument. To find a good entry position you should look to enter the market
in the direction of the trend right after a pullback has occurred. Put simply
you should buy pullbacks in an uptrend and sell rallies in a downtrend.
What
is the Fibonacci sequence?
The Fibonacci sequence
is a mathematical sequence in which every number after the first two is the sum
of the two preceding ones. Here are some examples. As you can see here, some
examples include:
0+1
+1+2+3+5+8+13+21+34, and so on.
If you take the numbers
one and one and add them together, you'll get two. You take the next two
numbers in the sequence one and two and add those you get three. The next two
numbers in the sequence are two and three, add those you'll get five so on and
so forth.
Fibonacci lines are used as a retracement calculator in any market. Areas of support and resistance for the present price action are determined by the retracement's percentage.
The
most important of these levels is the .618 level. Although, the .500 area also
offers very strong support. Even though it's not technically a Fibonacci percentage,
we still use this in our trading.
How
to draw the Fibonacci lines.
To draw the Fibonacci
lines you need to
- Locate a recent extreme low that's marked in the chart.
- Locate a recent extreme high, that'll be in teal.
- Connect the recent extreme low to the recent extreme high with the Fibonacci retracement tool.
Let's draw Fibonacci
retracement trading lines for a down move. Since it is a down move. So in step one,
it's the opposite of what we did for the move. We're going to;
- Locate a recent extreme high.
- Find the most recent extreme low in teal.
- Connect the recent extreme highs to the recent extreme low with the Fibonacci retracement tool.
How
do we predict when the market will pull back?
This is where Fibonacci retracements trading come in. You must recognize the swing high and swing low points of a trend to apply Fibonacci Retracement Levels to your chart.
The highest point seen within a specific period is known as a swing high. When a low is lower than any other position over a certain length of time, it is referred to as a swing low.
You draw a line between the swing low and swing
high using the trading platform's Fibonacci retracement trading tool. The horizontal
lines that occur at Fibonacci retracement levels are automatically
calculated by the trading platform (trading view). The most popular Fibonacci retracement
levels are 38.2%, 50%, and 61.8%.
In the trading platform (trading view), you have a Fibonacci retracement trading tool, it places support and resistance levels on your chart based on the Fibonacci numbers. There are many theories, mathematical equations, and strategies out there to try to make sense of a market that is largely speculative.
However, it is widely accepted among traders that rely on technical analysis that most major moves will retrace around the Fibonacci levels and more specifically around the 50% level of the move.
In an uptrend, a price will therefore retrace a portion of the move
downward before beginning its extended upward journey. Similar to an upward
trend, a downward trend will see a price increase before continuing to decline
over time.
If the price moves beyond the 50% level, it might be a signal a trend reversal is about to happen and it may be an opportune moment for switching the direction of your next trade.
So traders use the Fibonacci retracement trading tool as efficient
entries in the direction of the trend because many traders watch the same
levels and place buy, sell or stop orders based on them. As a result of their
high degree of accuracy, they come true.
How
should you enter an uptrend?
For a market entry, you can use the Fibonacci retracement levels. For an entry in an uptrend, you should look to see whether the price finds support at these levels. Then, before entering, we advise you to wait for evidence that the price will resume its upward trend.
As with any technical indicator, it is better to seek additional indications to support your initial analysis so that you don't base your trades solely on Fibonacci retracements. To buy or sell, watch for obvious signs.
For
instance, wait for a bullish candlestick to close in the desired
direction to give you more confirmation on whether you should place an order. You
can now place a market order if it does form because you have good reason to
think that this level will hold.
How
to enter a downtrend?
Likewise, for a downward
trend, you can place your entry after the price is found at resistance at the
Fibonacci levels. You can put your entry order after it is clear that the price
will resume its initial downward trajectory.
How
to place your exit?
Now that you have decided on your entry, you need to determine your exit strategy. There are two steps in your exit strategy. The first step is choosing where to put your stop loss. Where to put your target profit is the second.
For an upward trend, we
suggest you place your stop loss just below the retracement level. We advise
you to set your stop loss exactly above the retracement line in a bearish
trend.
Where
should you take profit?
If we forecast market entrances using Fibonacci Retracement Levels, we can apply Fibonacci Extensions to set plausible profit targets. Potential take-profit levels for trades in the trend's direction are represented by Fibonacci extensions.
Similar to the
retracement levels the key Fibonacci extension levels are 38.2% 50% 61.8% as
well as 100 138.2% and 161.8% extension levels. The Fibonacci extensions
correspond to the retracement levels making it all very simple. If you enter at
50 or 61.8%. A good take profit is the corresponding extension level at 161.8%.