How To Profit Using Fibonacci Retracements and Extensions
The markets move in bull and bear cycles in different patterns and cycles. As a trader we try and forecast this movement, and try to find high probability entry. To assist in this task we use different indicators and tools have been proven to help us be more accurate.
The different indicators we might use include oscillators, moving averages and others. There are a few of us that use Fibonacci retracements and extensions to help identify strong entry and exit ones. If you practice with using Fibonacci tools you will probably be amazed at the precision you can attain.
I want to cover in this article how to use Fibonacci extensions and retracements. These are the most popular of the Fibonacci tools for use in trading stocks, options or forex. If you want more accuracy and precision these tools are absolutely critical.
A Fibonacci extension refers to an impulse wave, and an retracement refers to a corrective wave. This is why Elliot wave theory is an important small part of proper Fibonacci analysis. With an extension we are measuring where price will move to beyond the 100% mark. With retracements we are assessing where price will stop and reverse into the prevailing trend.
When we say retracement we literally mean retracing old territory. As it relates to a bull market a retracement is a measure of where price will fall to before resuming into the prevailing trend, or back into the impulse wave. With a bear market where measuring where price will move up to before resuming the trend.
Keep in mind that the previous high = 100% of the move between the previous low and that high. So now we begin to measure the “corrective wave” and how much it will correct. Here are the most common and most accurate retracement levels:
* 23.6% - This is the shallowest retracement level, very strong markets will only make it to here. * 38.2% - Fairly common retracement level, still a nice level. * 50% - This represents half of the previous move, and this is a critical point. * 61.8% - At this point you should question the strength of the trend. * 100% - This is where the entire move has been negated and the trend is exhausted.
When identifying Fibonacci retracements you simply click and drag from the high to the low using the Fibonacci tool. Your retracements will automatically be laid out and marked. In some cases they aren’t marked and my only suggestion is to get another vendor because this is critical. I use TOS and Telechart because Telechart doesn’t mark the Fibs. lines. Once laid out you just watch price action.
When price reaches a Fibonacci retracement level and finds support and reverses our next step is to plan our exit. Once price goes beyond the 100% high in resuming the trend we look to the extensions of 161.8 and 261.8%.
In most cases when you lay down your retracements 2 extensions will automatically be laid out. You may have to adjust the screen to see them. Again we look to extensions for reasonable expectations provided we are still in the trend. Look to at least 161.8, and often 261.8 in stronger trends. A move from a 50% retrace to a 161.8 extension is generally a darn good trade.
Uncategorized