Mastering Fibonacci Retracement A Step-by-Step Guide for Effective Trading

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    33. MACD How to Interpret and Utilize Moving Average Convergence and Divergence for Profitable Trading
    34. Bollinger Bands The Power of Indicators in Trading and checklist
    35. Fibonacci Retracements Unravelling the Power in Stock Markets
    36. Mastering Fibonacci Retracement A Step-by-Step Guide for Effective Trading
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Marketopedia / Technical Analysis / Mastering Fibonacci Retracement A Step-by-Step Guide for Effective Trading

Fibonacci Retracement construction

Fibonacci retracements are movements in the charts against the trend. To use them, we must initially identify the 100% move, either upward or downward. 

Here is a step-by-step guide:

The first step is to recognise both the minimum and maximum points: the trough is at 150, with the peak reaching 240. The difference between those two points makes up a 100% move.

Step 2) From the chart tools, select the Fibonacci retracement tool

Step 3) To connect the trough and the peak, use the Fibonacci retracement tool

Once the Fibonacci retracement tool has been chosen from the charts tool, a trader needs to click on the trough and drag the line till they reach the peak, while the software plots all of the corresponding Fibonacci retracement levels. Once both points have been selected, that’s when the software is able to complete the identification process, resulting in a chart that looks like this.

You can now observe Fibonacci retracement levels which have been calculated and added to the chart. Utilise this data to plan your trading strategy.

How should you use the Fibonacci retracement levels?

If you desire to acquire a certain stock, yet its sharp rise has thwarted your endeavours, the most prudent course of action is to wait for an adjustment. Fibonacci retracement levels at 61.8%, 38.2%, and 23.6% could offer a potential barrier at which the stock might correct itself.

By plotting Fibonacci retracement levels, traders can identify potential entry points. It should be noted, however, that the Fibonacci retracement is best used as a verification tool rather than a primary trading strategy.

I would only consider buying a stock if it had fulfilled all the items on my checklist. My confidence in purchasing it would increase further if the stock had satisfied:

  1. The formation of a specific candlestick pattern was noticed.
  1. The stop loss aligns with the S&R level.
  1. Volumes are above average.

Utilising the aforementioned points, if my stop loss also occurs at a Fibonacci level, then I am confident the trade setup meets all criteria and calls for a buy. The degree of assurance is understood by my use of the word ‘strong’. The more confirming factors we include in our analysis of the trend and reversal, the more reliable the signal becomes. This principle applies to short trades as well.