FIBONACCI – Retracements



FIBONACCI – Retracements
-A Forex Trading  Perspective-

Fibonacci is an analytical tool which was invented in the 13th century by “Leonardo Pisa”.

In Forex trading, the Fibonacci is one of key tools that assist traders in determining when is the right time to buy or sell. It provides traders with reliable information on what the market has been doing and what it intends doing next – through Retracements as an example.

In Forex trading, Retracement can be defined as; price correction (pull-back) during an impulse or larger (up-ward or down-ward) trend. Retracements are simply price corrections rather than actual trend reversals.

However, as pull backs, Retracements act as an opportunity for traders to enter trades in their original direction, but take advantage of better prices during the retracement periods.

Characteristically, a Retracement is followed by an impulse move which carries on in the original direction. Therefore, they provide a temporary opportunity for traders to buy at cheaper price or sell at higher price.

NB:
-The best point to buy is following a pull-back while the trend continues to rise.
–The best point to sell is following a pull-back while the trend continues to fall.

A Fibonacci Zone (Fib-zone) is an area within Fibonacci, situated at around 50% to 0.618% level. This is the area where retracements (pull-backs/ price correction) usually end and from where new impulse moves usually begin.

However, sometimes pull-backs do slightly fall short or exceed the Fibzone area, for instance where an impulse-move is too steep (almost vertical in shape) that its correction /pull-back/retracement is shorter and ending at around 38%, instead of the normal 50% – 0.61% level.

Similarly, Retracements can go past the Fibzone, indicating that it is no longer a price correction or pull-back but an actual change in direction of the trend hence, time to plot a new Fibonacci in the opposite (now current) direction.

Mind you, Fibonacci can be plotted during two scenarios or directions: –

1) Down-Up – in an upward trend/move:
 In this case, Fibonacci is drawn/dragged from the last significant low (swing low) to the most recent high (swing high).
In other words; it is dragged from the tip of the recent bottoms to the peak of the recent highs on the chart.

2) Up-Down – in a downward trend/move:
This is where Fibonacci is dragged from top to bottom of a trend chart.
In other words; it is drawn from the peak of recent highs to the bottom of recent lows.

It is equally important to note that the essence of Fibonacci-Retracement analysis is to measure trend impulses in relation their pull-backs (retracement), so as to determine if a particular retracement is just temporary correction or a definite change in direction of the trend.

But just as is the case with all other indicators, a trade should not be entered until the outcomes of the Fibonacci analysis are confirmed by other analytical tools, such as the appearance of retracement candlesticks (eg. the hammer) on specific points, as well as confirmations from indicators like RSI (over-bought or over-sold conditions) and MACD (above or below Zero) among others.

The trader must be able to apply several analytical tools in order to build a case for entering the market.
And always look at the Structure of the trend, particularly on the left of the structure for clues! As the popular saying goes; “Look left! Structures leave Clues!”.

It is widely believed that; markets trend 30% of the time, and they are in consolidation 70% of the time. Consolidation is the period when markets move up and down along (within) the same price levels. This means that those who understand and effectively use their analytical tools make money during the 70% of market consolidation.

In all, Fibonacci is a key item in the Forex trader’s tools box, for it informs the trader on what the market is doing and what it intends to do going forward.


Compare: Fibonacci Retracement with Fibonacci Extension (Profit Targets).

OJ Mwale – Sani Global - Forex

Check the links below, you may find them useful: –

https://tinyurl.com/ybcmgtmr
 
https://tinyurl.com/ycxm8wv2

https://tinyurl.com/y7bqcoqy

Comments

Post a Comment

Popular posts from this blog

Harmonic Patterns

Image
Harmonic Patterns – A Forex Market Trader’s Perspective – Harmonic patterns are formations on forex charts, created by price movements in the market. These patterns assist the trader to: – Analyze the forex market and forecast its price movement with precision therefore Determine potential trend-retracement areas (entry and exist points) with the highest possible accuracy. In other words ; Harmonic patterns use Fibonacci retracement levels to geometrically draw patterns that depict potential trend-reversal zones, thereby assisting the trader to precisely highlight the best trade entry/exit points. Due to their proven accuracy in pin-pointing potential trend-reversal zones in forex market, Harmonic Patterns are key (advanced) tools in the trader’s box. Harmonic Patterns are usually characterized by “M” (Uptrend) and W” (downtrend) shapes and can be categorized into Seven basic patterns: Gartley , Butterfly , Crab , Bat , Shark , Cypher and Deep Crab
Read more

The Butterfly-Harmonic Pattern

Image
The Butterfly-Harmonic Pattern - Forex Trader’s Perspective - As explained in our introduction , Harmonic Patterns use Fibonacci retracement tool, to enable the trader determine turning points (trend reversal zones) with nearest accuracy. All Harmonic Patterns are shaped in a zigzag formation, “M” shape depicting an uptrend and a “W” depicting a downtrend. The Butterfly like all Harmonic patterns, has five points - namely, “XABCD”. As always, the market will provide the “XA” leg – being the impulse leg or move. The trader therefore is expected to identify the remaining “BCD” points. Therefore, using the Fibonacci retracement tool, you can measure and identify “BCD” points based on the following measurement guidelines or Criteria : - Plot the Fibonacci from peak of to the lowest point on the chart, then identify: - 1) Point B: Which should be at around level 78.6, retracement of leg “XA”. 2) Point C: Which should be between 38.2 and 88.6, retr
Read more

The Gartley - Harmonic Pattern

Image
Harmonic Pattern – The Gartley Harmonic Patterns enable traders to determine turning points with precision and high accuracy. In our introduction to Harmonic Patterns, we indicated that; all Harmonic patterns have five points – namely, “XABCD”. Of the five points, the market always provides “XA” which is the impulse leg/move. Therefore the trader is required to identify the remaining points - “BCD”. The Gartley pattern is the most commonly used harmonic pattern, and it was founded by an American ‘Harold McKinley Hartley’ (H.M. Hartley) in 1932.  Like all Harmonic patterns, The Gartley is based on the Fibonacci retracement numbers, and it is used to help traders forecast/identify turning points on the market-trend chart. It is therefore a good indicator on when to enter or exit trades. Using the Fibonacci tool, the Gartley pattern identifies BCD points by using the following measurement Criteria : - >Point ‘B’ is 61.8 retracement of leg “XA”. >Point
Read more