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LESSON: Price Action and Fibonacci

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[op_liveeditor_element data-style=””][text_block style=”style_1.png” align=”left” font_size=”16″ font_font=”Montserrat” font_color=”%237e7e7e”]Fibonacci is a tool that is popular with many technical traders that was designed in the 13th century by a mathematician Leonardo Fibonacci.

Fibonacci is a well known mathematical series of numbers with each number being the sum of the previous two.

Fibonacci can be used as a tool in the markets by taking to extreme points, usually the high and the low of a stock or Forex pair and dividing the vertical distance by the key Fibonacci ratios.

The key Fibonacci ratios we concentrate when trading the markets are the 50% and 61% levels. These are the only levels we want to be using. Whilst the 50% level is technically not a Fibonacci level it is the most used retrace level in the market and this is by far and away the most common and reliable retracement level.

Traders can get carried away when using Fibonacci levels and they can fall into the trap of trying to place a Fibonacci on every market. This is a mistake.

We only want to be using Fibonacci when:

• There is a clear trend either short or medium term
• We have a logical pullback in that trend
• The key Fibonacci levels line up with other support and resistance.

We do not want to use Fibonacci alone in the markets. It must be backed by other forms of support or resistance.

Cherry Picking Your Fibo Spots

When we have spotted a clear trend in the market we can always expect that trend to reverse and rotate at some point as markets do not move forever and have to reverse.

We then look to apply the Fibonacci tool. We can map the high and the low and be guided to where a logical point the trend will continue and where we can look for Price Action to get into the trend.

Looking to get aboard the trend is always the best course of action as the trend really is our friend. The Fibonacci tool allows us to look at a market and have an idea where price may roll back over and continue with the trend.

We only want to deploy Fibonacci in the most obvious of trends and markets. Looking to use Fibonacci just for the sake of using it will bring us undone. I must stress we only want to be concentrating on the 50% and 61% levels and ONLY when there is an obvious trend in place.

Whilst 50% is not a technical Fibo level it is a major retracement level and a crucial retrace point of key importance when looking for value in rotations.

We can use Fibonacci as a guide only of where we can look for Price to give us a signal when it wants to roll back over in the direction of the trend. We only enter when Fibonacci lines up with other support and resistance and Price gives us a clear signal such as a Pin Bar or Engulfing Bar.

When Fibonacci continues past the 61.8% level it is generally thought that the trend is over and another trend may be beginning or price could be going to test the extreme high or low.

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