Each trader applying technical analysis has many postulates he relies on in trading. Quite often it turns out that traders do not go deep into the matter, guided by their market experience only. However, there are effective theories applied to the markets which lack substantial ground. They can be proved by statistics only. This is the kind of theories Fibonacci number theory is attributed to.
Originally, this trading instrument was used on a bull market. Traders had to plot Fibonacci retracement levels manually. The Fibonacci conception was gaining popularity. Permanent practice has revealed its many advantages.
Fibonacci levels describe the interaction between trend and countertrend markets — 38%, 50% and 62% retracement from the reverse point. As a rule, percent ratios are applied after the trend is determined. Find out the points of percent levels crossing those of price by stretching a grid over the most apparent up or down waves.
Great trading opportunities are ensured by converging patterns and retracement levels. It should be remembered that retracements are ineffective in vacuum. Keep an eye on highs, lows and moving averages to make sure a certain level is important.
The discrepancy between a retracement and a basic pattern does not result but in a market noise, not to mention an expected profit. The patterns which contain incongruous analysis aspects are not recommended to use. Such incongruity leads to numerous abrupt reversals on price charts. On the contrary, the correlation between Fibonacci levels and patterns ensures highly predictable reversals at narrow price levels.
The two examples below are to be of help to you in working with Fibonacci. Using these methods in trading is sure to make your trading profitable and convenient.
The first rise/ first fall marks 100% retracement of a trend within a certain period of time. It can be regarded as a reversal warning. 100% retracement alters the major price movement which then terminates the trend it corrects. If a previous retracement level of 38% is broken through, then the old trend can reestablish itself. Most often traders tend to use this level to open positions against the old trend, which minimizes the risk.
Overnight grids
Find an active market instrument and start stretching a grid either from a low or high registered within the last hours of the session. Stretch a grid to the opposite direction to a low or high of the first hour of the following morning. This determines certain price waves a trader can use in order to find intra-day gaps, break-outs and break-downs. In addition, this type of grids is applied to morning gaps. Stretching across a key retracement, a gap will provide an opportunity of entry to the market with low risks at a pullback.
