Fibonacci Retracement Tricks
Using Fibonacci retracements and extensions to foreshadow resistance and support lines of a particular security is a very effective and accurate trading technique.
However, as with any indicator, the Fibonacci retracements and extensions can be used on their own but the best results are often gleaned from using the indicator in conjunction with another indicator or by understanding how to use the indicator through a number of established tricks.
By utilizing a few well-known crafty tricks, a trader can confidently use Fibonacci retracements and extensions to enter and exit the market at times when the price is very likely to behave in a particular manner.
Fibonacci retracements and extensions are known throughout the trading world to be excellent predictors of a security’s resistance and support lines.
On countless occasions these retracements and extensions have proven themselves to be accurate and consistent and this is why they are amongst the most highly valued tools available to the modern trader.
However using the Fibonacci retracements and extensions purely for these means can be considered limited in terms of broader potential.
The Fibonacci sequence can be used in a number of creative ways to help predict other movements within the market and these are also equally reliable in providing the trader with detailed information on where to enter and exit the market.
One particularly useful strategy when using Fibonacci retracements and extensions is the congestion strategy.
In order for this to work effectively a trader must accurately choose high and low price points and they must correctly lay a Fibonacci retracement pattern over the top of a candlestick chart. Once this is successfully achieved the congestion strategy can be put in to place.
This strategy works on the basis that on a number of occasions there is often a congestion of price movement between the 38% and 62% ratios.
When this congestion builds up the price of a security will often rebound back and forth between these two ratios and when this is witnessed a trader can accurately predict that a major breakout is about to take place.
By using the appropriate strategies and by taking advantage of evidence from other indicators a trader can take advantage of this price breakout and potentially make a large profit when it occurs.
Another useful trick when applying Fibonacci retracements and extensions concerns how to accurately place the indicator.
Often traders face problems when correctly choosing the appropriate high and low points of a trading range and if these are incorrect all the evidence laid out by the indicator will inevitably also be wrong.
In order to avoid this fundamental mistake, traders must use a handy trick that helps ensure that the correct highs and lows are chosen to guarantee the retracements and extensions work accurately.
Often the absolute high or low of a trend is not the best place to start and a more accurate position would be where the price of a security has hit a high or low on more than one occasion in a congested area. This ensures the whole retracement and extension will be more reliable.
There is a definate art to Fibonacci trading that can be had with a very samll learning curve and the reudced risk is an absolute must if you plan on trading for the long haul.
By: Mark Deaton
