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Fibonacci Retracements

Fibonacci Retracements

2010-01-12 13:57:00
Thomas Long, Course Instructor
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However, at times there does not seem to be any visible support on the chart to offer that opportunity.  This is one situation where the use of Fibonacci retracement levels can offer that support for a buy in an uptrend or resistance for a sell in a downtrend.  The key is to first identify the direction of the trend and then to wait for that move against the trend.  The use of Fibonacci retracement levels offer three popular levels of potential support in an uptrend and three levels of resistance in a downtrend and they are the 38.2%, the 50% and the 61.8% levels.  An example would be if the market moved down 1000 pips off of a high to a low and started to rally off of that low, a 38.2% rally would be 382 pips of that 1000 pip move, a 50% rally would be 500 pips, while the 61.8% rally would be 618 pips off of the low.  Many traders will sell at the 50% or 61.8% retracement levels and place their protective stop up above the 61.8% level.  Others will use a technical indicator to help better time their entry.  The rally to within the 38.2% and 61.8% levels signals the trade, while on the chart below we used a crossover of Moving Average Convergence/Divergence (MACD) as the signal to enter into the trade. 

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This example uses all of the classic trading tools.  We only look for sells since the trend is down, we wait for a rally up to resistance to note a trading opportunity and then we use a technical indicator to help us time our entry.  If this looks simple, it is because it is meant to be simple.  The difficult part is waiting for these solid setups to form and then to be there to take advantage of them.  But knowing what to look for is the first step to trading these setups.

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