A really simple way to identify confluence is simply to use the Fibonacci tool to itself and measure different swings to find levels that coincide as these tend to be the most powerful. When applying Fibonacci levels to a chart, these two points are where we need to place the tool’s anchors (1 and 0). In my strategy, I use the Fibonacci extensions to find trends that have completed an ABCD pattern and are likely to reverse.
A mix of another trading strategy and the use of the Fibonacci extension as a confluence to an already-working trading strategy can be instrumental. For example, the price can easily break the 123.60% extension percentage and may reverse from 161.80%. Another limitation in Fibonacci retracement level strategies creates a dilemma in many traders. For example, as the retracement levels are close to each other, many traders fall into an extensive dilemma when they think a certain retracement level would work and another would not.
What are Fibonacci Extensions?
Later, the sequence was referred to as the Fibonacci sequence and was comprehensively used by many top traders, hedge fund managers, and investors in their respective trading styles and strategies. In the sequence, after 0 and 1, every number is the sum of the two prior numbers such as 0,1,1,2,3,5,8,13,21,34,55,89, etc. The golden ratio in these sequences is 1.618, as every number is over 1.618 times higher than the preceding number.
In this case we’re trying to predict where the price may retrace to after a move down. When using Fibonacci retracement levels to identify support, we are attempting to predict where the price may retrace to after moving up. In other words, we’re identifying where the price might land after it has reached a peak and started declining.
How to draw Fibonacci extensions and retracements
After identifying the ‘A to B’ move, you pay attention to the retracement level C. As you can see, the first 3 screenshots show the typical ABC move of a Fibonacci retracement. Point C is very obvious on all three charts and price bounced off the Fibonacci levels accurately. Often, traders who have no prior experience with Fibonaccis are worried that they are ‘doing it wrong’ and they then don’t use the Fibonacci tool at all. I can assure you, there is no right or wrong when it comes to drawing Fibonacci and you will also see that different traders use Fibonacci in slightly different ways.
If a trader is long on a stock and a new high occurs, the trader can use the Fibonacci extension levels for an idea of where the stock may go. Fibonacci extension levels can be calculated to give the trader ideas on profit target placement. The trader then has the option to decide whether to cover the position at that level. Once you start to combine some price action analysis or combine indicators with these Fibonacci levels you can create some really profitable trading opportunities. In the above example we can see the Fibonacci expansion levels marked on the chart from applying the tool to the high, low and retracement low.
Moreover, suppose a trader is taking advantage of a bull trend in stock and has long positions set on the stock. In that case, the trader can easily layout Fibonacci extensions and look for possible literate take profit levels. The Fibonacci extension can help the trader identify different reversal points.
- The golden ratio in these sequences is 1.618, as every number is over 1.618 times higher than the preceding number.
- Multi-timeframe trading describes a trading approach where the trader combines different trading timeframes to improve decision-making and optimize…
- The Fibonacci extension can help the trader identify different reversal points.
To set up the anchors of Fibonacci’s retracement correctly when looking for support levels, we must put the first anchor of Fibonacci retracement at the swing low (number 1) and the second anchor at the swing high (number 0). Multi-timeframe trading describes a trading approach where the trader combines different trading timeframes to improve decision-making and optimize… The most common use for Fibonacci levels is the regular retracement strategy.