Once we have a trend, we do not want to trade against that trend but we want to trade with the trend.
In an uptrend, you want to buy while in a downtrend you are looking for sell opportunity.
Even if you want to trade with the trend, you do not want to open a position randomly.
You want to find an area with the best opportunity for profit but also with the least risk as possible.
Finding these areas is what makes the difference between masters and average traders.
In an uptrend, you want to wait for some retracement to get better entry opportunity while in a downtrend you want to see some pull back so you can sell it higher, right?
Yeah but while you want to get better entry, at the same time you do not want to miss an opportunity waiting for better entry to come.
In a very active market, the price can retrace just a little bit and continue its move.
How to find a balance between these two areas?
People like to use trend lines to mark areas where price may offer a good opportunity.
They also use the areas that were important in the past.
The majority covers the chart with a bunch of lines (indicators), so they can barely see the chart.
While using trend lines and important areas in the past is a great way to find an opportunity, indicators will just hide signs from you.
In order to make your analysis more precise and more importantly more useful and profitable, you can add Fibonacci retracement to your trading arsenal.
While trend lines and important past areas are visible on the chart, Fibonacci ratios are hidden unless you use the charting tool and plot it on the chart.
They act like hidden important areas.
Without going further ado, let us introduce you to an example of Fibonacci retracement.
Don’t freak out when you see all these percentages and lines.
As always, we will explain them as deep as possible so it will be easy to understand to anyone.
Once you have a move up, you are using Fibonacci retracement to mark areas where the price may find the support.
We like to call them hidden support areas.
How do we get these percentages?
You are not on an exam and that’s why knowing too much about these percentages is not required.
You don’t have to calculate them, it is all done by trading software.
They are derived from different combinations of Fibonacci numbers.
Because the majority is looking at these price levels because they are the same for everyone, the price may react to them, and that’s the main point of using them.
So, what you want to see is bullish price action in the area around some of these levels.
Once you get a bullish rejection, you can consider it as a sign for upward reversal.
What is the story behind these levels?
0.236 is the highest one and represent the first area of a potential reversal.
If the price forms bullish price action in the area around this Fibonacci level, it is considered extremely bullish cause price retraced almost nothing.
0.386 is the second area which could give us a bullish sign.
Considered as very bullish one too, if price holds above this area, we have confirmation that the trend is powerful.
0.5 is not Fibonacci level, but it is added because it represents half of the previous move and price often likes to retrace half of its previous movement and start going up again.
It is still considered as bullish if the price forms a bullish sign.
0.618 , also known as the Golden ratio, is the number we adore.
While 0.236 and 0.382 would be considered very bullish rejection, 0.618 is favorite because it gives the most profitable setup.
Price dropped nicely from the top but still not too much so the price action is considered bullish if it forms some of the bullish signs.
As the trading is the game of probabilities, the trades that were taken around this level are the ones with the best risk-reward.
0.786 is the first area that if gets reached, shows signs of weakness.
The retracement to this area wouldn’t be considered so bullish, and without a big bullish sign, traders usually avoid trading this Fibonacci level.
1 means fully retracement and in that case price action is considered very bearish and looking for buy entry is not suggested until price shows some clear upward momentum.
Before learning how to plot Fibonacci retracement, make sure that you understood how to identify swing low and swing high.
The primary usage of Fibonacci Retracement is to give us price points where we could see a trend reversal.
But to get these points, we need to find the trend we would like to analyze.
It won’t be as useful as it should be for any random move you chose.
To make it most useful, use it on obvious trend.
Not only for uptrend, it could be used for downtrend. Same rules worth for both.
As you can see, after we identified the trend and found the swing low and swing high of that trend, we took a Fibonacci Retracement tool and plotted it on the chart.
In the course about Tradingview, we will explain to you exactly how to put it on the chart.
Believe us it is straightforward since it requires only two mouse clicks after you’ve defined swing low and swing high.
As we said, 0.236 is the Fibonacci level that presents an extremely strong trend.
If either uptrend or downtrend retraces only to this area and keeps moving in its direction, it is considered a very strong trend.
Even if the represents a strong environment, it is barely traded because it doesn’t usually offer profitable risk-reward.
While 0.236 and 0.382 are considered as very strong trend indicators, 0.500 and 0.618 are considered as optimal reversal points.
Not only that they still holding the price at the areas that are interested for those who want to see a continuation of the main trend and reversal of sub-trend, but they are also giving very profitable setup.
The area between these 2 is the most watched are for potential entry setup.
0.786 is the area that is barely watched since it gives a sign of weakness.
If trend reverses more than 70%, it can’t be considered a strong one.
That’s why it is barely traded unless price gives some strong sign on its retest.
As we went through theory, let’s show you an example of its everyday usage.
After you identified the trend you want to analyze, found the swing low and high, plotted the Fibonacci Retracement, next step is to wait.
Waiting, maybe the most important part of the trading but the part that makes a difference between profitable trading and gambling.
You are waiting for the Fibonacci level to show you the sign. A
s we are analyzing downtrend, we want to see the bearish sign so you can open the trade and look for trend continuation.
Without going further ado, let us show you an example.
Here we have the example above.
After making second higher low, we got swing low so we could analyze the entire move down.
0.236 and 0.382 were not strong enough to hold price below but 0.500 acted like resistance not once, not even twice but three times.
As we like to trade with confirmation, we would not sell the first test because it would be trading against that subtrend that actually was clearly up.
Double pinbar was a good confirmation that it acts as a resistance, but we personally not try to go against the trend on the first test.
Once it was confirmed that price is having a problem breaking 0.5 Fibonacci level, we mark that area as potential resistance and once it gets approached next time, we will look at it closely.
As we said, we wait for a confirmation which happens after candlestick close.
On the second test, we got bearish engulfing but closed too low that opening a trade wouldn’t make any sense since it would be too far from resistance and too close to the target.
The risk-reward would be too bad.
After the second rejection, that area becomes even more important to us.
Luckily on the third test, we saw bearish pinbar that didn’t drop too much so opening trade would still make a sense.
As you can see it would be confirmed as resistance on the third test too.
All 3 tests gave us either bearish pin bar or bearish engulfing and that’s why we mention these two types of candlesticks always.
While there are hundreds of different types of candlesticks, focus on the best ones and make your strategy as simple as possible.
Milos is an independent trader, with a background in journalism and publishing. Nomadic by nature, he’s lived in four different countries this decade. He’s fascinated by Blockchain technologies’ potential to reshape all aspects of our lives. Milos got into Bitcoin while completing his degree and hasn’t looked back since, writing about anything crypto-related. He is the co-founder of the Cryptoaims and he has a strong passion to educate people about this revolutionary technology.