Hi Fellow Traders. Philip Thygesen here from
Stock-Market-Strategy. Before I start I just
want to say that trading involves risk and
hard work. So please do your own due diligence
before trading for real money. Today I am
going to talk about Fibonacci Retracements
and Extensions. I will explain the theory
behind Fibonacci and then show you some charts
about how Fibonacci works. Finally I will
give some tips about how to best use Fibonacci
in conjunction with chart analysis. If you
go to our website www.stock-market-strategy.com
you will find a tab called education, technical
analysis and Fibonacci Retracements/Extensions.
Here you will find a written explanation including
an annotated chart. This is made to make it
easy for you to keep track of the information.
You might even print this page out so you
can have it in front of you while back testing
or writing your trading plan. Background Information
About Fibonacci The Fibonacci sequence was
introduced to the West more than 800 years
ago but we run into the Fibonacci sequence
on a daily basis such as playing card dimensions,
Greek art, computer screen ratios, etc. Fibonacci
numbers are 0,1,2,3,5,8,13,21 and so on. It's
these numbers divided with each other that
give us the Fibonacci retracements and extensions
areas. For example, the 62% retracement is
calculated by taking 13 divided with the next
number in the Fibonacci sequence 21. So that's
how we derive the 62% retracement. If you
want to learn more about the calculation then
visit the website. Now with any support/resistance
it's important to understand that these Fibonacci
levels are more like zones. Price will often
oscillate around these areas so they are not
hard reversal points but potential reversal
points. It is therefore important to use Fibonacci
retracement with other indicators and/or chart
analysis. Many traders keep an eye on these
numbers and that makes it a self-fulfilling
prophecy. Support/resistance is about finding
areas price will bounce/reverse off. And you
can do this by making qualified guess that
there will be many traders to buy/sell the
securities at certain areas. If, for example,
you know the Fibonacci Retracement/Extension
levels in advance you can predict where there
will be a larger than normal amount of buyers/sellers.
How To Trade Using Fibonacci Retracement Here
is one way to use the Fibonacci Retracement
for trading. This is a less known way to use
it but nevertheless it's quite useful. Here
we are seeing an uptrend in the stock. We
have a Fibonacci Retracement placed at the
high of the move from the low of the move.
We see that we are forming a triangle but
we are forming it above the 38%. This means
that the momentum is still strong to the upside
because the pullback is less than 38% it's
almost not pulling back. It shows the buyers
are still very aggressive to buy every dip
there is. Here you see the same chart but
I have added Fibonacci Extension. So let's
continue our trade. We go from the low of
the up move to the high and then down to the
low of the triangle. The low of the retracement.
From there we predict the resistance areas
in this up move. So if you were long you would
look at those areas to see if there were any
resistance so we need to book our profit.
For example we predicted that there would
be more than a normal amount of sellers waiting
because of the Fibonacci Extension. This is
where the self-fulfilling prophecy comes in.
We see this bar forming and almost look like
a Doji. It opens, pushes up, pushes down,
pushes up and closes almost unchanged. These
bars can be interpreted as a reversal bar.
So when you see that happening at your extension
you get more evidence saying it might be a
good time to book the profit or partial profit.
Trading Using Fibonacci Retracement/Extension
With Chart Analysis Here is a third way to
use Fibonacci Retracement/Extension. I have
combined them again but I am also using some
chart analysis. Here first we have our up
move, up to the high and we see that it retraces
38% or around 38%. We also see that the Fibonacci
Extension from that down move. If people were
short they might take the profit at the Fibonacci
62%. So we get confluence around this area.
And so add to that evidence we also come back
to what were resistance is now support. People
who went short over here are happy to short
cover their position when they get back to
breakeven. That's why support is now working.
And here we add all 3 things together to give
us a high odds entry. We are using Fibonacci
Retracement of the overall move. We are using
Fibonacci Extension of the retracement move
and we use normal chart analysis such as support
resistance. This gives a high odds trade.
This ends today's video. I hope you have enjoyed
it. Please remember to subscribe to the channel
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