Fibonacci retracement benefits all strategies that depend on price pullbacks. Examine these hidden levels by applying Fib grids, simple calculations or physical tools to relative highs and lows on price charts. Study these important interrelationships every day, even if the practice appears arcane or mystical. Fibonacci has a solid basis in mathematics although prior generations never suspected its impact on the modern financial world.
The trader acts according to careful planning and complex logic, while the emotional crowd acts according to nature. Fibs uncover the concealed interface between mathematics and emotion as they predict how the herd will respond to price development. Most participants use Fibs to examine countertrends, but rarely explore their ability to generate price projections at new highs or lows. These Fib extensions require more faith because the charting landscape lacks Trend Mirrors to cross-verify suspected reversal levels.
Fibonacci numbers consistently mark hidden S/R. Use these key pivots to enter and exit profitable positions. Fibs work best when they cross-verify other landscape features. Key retracement levels say little about subsequent targets all by themselves. Although a bounce at a common percentage can offer a good setup, it might end quickly unless cross-verification supports a larger trade. Odds favor that price will roll over to the next retracement level when it can't find adequate support. But odds increase for a substantial bounce when Fibs align with several other types of S/R.
Perform a detailed reward:risk analysis before a trade decision that relies upon Fib retracement. Other key Fib percentages will hinder progress after a price reversal. This may not hurt the trade if it depends upon a longer holding period. But if the strategy profits from a single, direct price thrust, sufficient reward must justify the position. Focus on getting into the market at major Fib ratios while standing aside as price hovers between key zones. Most times, the smartest execution will be counter to the most immediate short-term trend.
Price tends to expand from the 38% to 62% levels in primary trends and constrict between those same boundaries in countertrends. Conversely, it often exhibits parabolic movement between the 0% to 38% and 62% to 100% Fib levels in all trends. Keep these tendencies in mind when planning a safe exit. If congestion forms at 38% or 62%, the next thrust may be dramatic. As with other key breakouts, look for price to pull back after the first impulse to test the broken Fib boundary.
Fibonacci defines trend movement over broad time frames as well as very short ones. This retracement science also works in both bear markets and bull markets. Major selloffs frequently recover 50% or 62% of the last selloff before continuing the decline. Keep in mind that short squeezes should not retrace 100% of the last opposing move. Use the Fib grid to locate their natural failure levels for lower risk short sales.
