Monday 22 May 2017

How to use fibonacci retracement to enter trade during uptrend

We need to make it clear to forex traders, especially the new ones, that Fibonacci tool functions per excellence in a trending market.The tool is designed with the aim to detect possible important region of reversal of minor trend and continuation of major trend. Therefore in an uptrend, fibonacci retracement shows the possible price zone where minor trend(downtrend) may stop and reverse and where the major trend (uptrend) may resume and continue.
Traders go long at the support in an uptrend and go short at the resistance in a downtrend.The Fibonacci retracement levels also indicate the significant support levels in an uptrend and show resistance in a downtrend.Therefore, traders need to know how to draw this tool correctly on an MT4 chart.

Bearish retracement is expected to occur in an uptrend.And the Fibonacci tools can be used to gauge the extent of such retracements.
This particular post is written to explain how to draw and use the tool in spotting support levels during bearish retracement of an uptrend. Major retracement levels are levels 38.2%  and 61.8%. These two numbers indicate  the most important value areas during retracement. Market tends not to retrace more than 38.2% during a very strong trend.However, most retracements get to level 61.8%.
We know that fibo 38.2%  and 61.8% are not perfect levels and we equally know that  there is no perfect tool in the market. However, we can say it again and again that the majority of traders do watch these two golden numbers.That is why they work! Remember that trend also means  the direction of transactions of the majority.

One needs to determine the recent swing high and swing low before drawing the tool.During uptrend, Fibonacci retracement is drawn by
-Pick the Fibonacci retracement tool and
- Drag from from swing low, then
-Drop it on the swing low.
By doing these we will have the 100% on the swing low and the 0% on the swing high.This is because we can only have bearish retracements in uptrends.So, we consider the swing high as the origin of the bearish retracement (0 % ) and and swing low as the ultimate end of the retracement (100%).
The chart below shows fibo retracement 38.2% in action.



When traders apply fibonacci retracement tool to the  chart  like the one above,they expect that the fibo 38.2% is support level that is highly likely to halt the fall and usher in another rise in price.

Fibonacci retracement is drawn by picking the Fibonacci retracement tool and dragging it from swing low to swing high and then drop, we have the level 0.0%  placed on the recent swing high and level 100.0%  placed on the recent swing low. A trader therefore reads that the price has retraced the level 38.2%.

 It is widely accepted among traders that levels 38.2%  and 61.8%  are the most important retracement levels.The sellers will be closing their positions in profit around these levels or atleast protect them. Also, buyers will be watching out for price actions around this level to know when exactly to join the upward price movement.

The forces that move the market do not exist in a vacuum.The market is 100%  psychological and psychology is a vector quantity which means that it has  direction and size.People look for reasons to buy or sell a given pair at a particular time.This is what we call either technical or fundamental  analysis.This psychological nature of the  market is what empowers technical indicators to work. Therefore, any form of analysis that is used by the majority will dictate the net market direction.The market moves in the direction of the net market force which in turn comes from the majority. A conservative use of popular  technical indicators is what enables traders to make the same analysis of the market as the majority at any time. One of such most used technical indicators is Fibonacci tools. This tool has been discovered for over a century and they still work like fire.

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