Tuesday, 21 February 2012

Fibonacci Retracements - What Are They and Why Do They Work?

Markets never go straight up or straight down for very long. They go up in sections, or steps. Take a look at any swing chart if you doubt this. There is a move forward, then a counter move backwards, against the trend. Determining where these counter moves will stop is where the Fibonacci retracement levels are useful.
Whether you are looking at a macro or micro view of the market, i.e. weekly, daily, or 5-minute chart, you will find these retracements. They exist on all levels of the market viewpoints. Obviously the strongest levels will be found on the higher time frames as they will give you the bigger picture. However, even looking at a 5 minute chart you can notice that the market goes forward, then reacts, like a stair case.
So, how do we apply these Fibonacci retracements to our chart?
Most charting packages, and charting software that brokers offer comes with this indicator so all the calculations will be done for you. What you do is take a LOW point on the chart, and measure the range up to the next HIGH, or swing as they are called. Vice versa for a downward move. This is the range.
So the market has made a move up and is now making a counter-trend move down. We look at this range and calculate the Fibonacci levels as follows: 23.6%, 38.20%, 50%, 61.8% and 76.4%. These are the most commonly used levels, as well as projections of these levels above/below the reference range: 150%, 161.8%, 261.8%, etc. Once these levels are in place on your chart, watch these levels when the price retraces to them.
The most common retracement level is the Golden Ratio, or 61.8%. Many retracements against the trend will stop at this level. Then, if this does happen, my tip is to next watch the 161.8% level. In my experience, a 61.8% Fibonacci retracement will then go on to find resistance again at 161.8%. Good profits can be made just by being aware of these levels, and placing your trades according to them.
For a great resource and application of this method that will consistently produce good profits for you, please click here.
Jeremy Gard is a Futures and Currency trader and works from his home on the Gold Coast of Australia.

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