Fibonacci trading is a form of technical analysis and it was discovered by an Italian mathematician who discovered Fibonacci numbers are a sequence of numbers and each successive number is the sum of the two previous numbers. When used to trade stocks, commodities, or other financial instruments, these numbers anticipate changes in trends as stock prices tend to be near lines created by the technical analysis Fibonacci studies. In todayís article we will take a brief look at Fibonacci retracement, extensions, arcs, and fans and how they are used when trading using Fibonacci indicators.
When Fibonacci trading retracement is a popular tool used to identify strategic places for transactions to be placed, or for stop loss orders or target prices. Retracement refers to the likelihood that a stock, or other financial assetís price will retrace a large portion of an original move while finding support or resistance at the key levels before it continue in the original direction. Retracement is also used in other theories such as the Elliott Wave Theory.
Extensions are used most often in combination with other types of technical indicators as a way to help determine the best target prices. They forecast areas of support and resistance and they consist of all levels that are drawn beyond the standard 100% level. These extensions help stock traders to determine where they will take their profits when Fibonacci trading.
The Fibonacci Arc is created by an invisible trend line between two points, and also by three curves that intersect this trend line at the key Fibonacci levels. The first two points are typically the high and the low in a given period of time. The arc is a stock charting technique and these curved lines are actually drawn in order to determine where to anticipate key support and resistance levels, as well as areas of ranging when stock trading. When the asset crosses through these key levels, the transactions decisions can be made by the trader.
The Fibonacci fan is another charting technique used when Fibonacci trading and it helps to identify key levels of support and resistance as well. This fan consists of three diagonal lines that use Fibonacci ratios. The fans are created by drawing a trend line again through two points in a specific time frame, and then by dividing the vertical distance between the two points by the ratios mentioned above. Again, these two points that create the trend line are typically the high and low in given time frame. (See also trend analysis and trend stock trading)
Fibonacci trading is not one that is necessarily grasped quickly. It is however more useful when paired with other types of technical analysis tools such as Candlestick analysis. When Combined with Candlestick Signals, the savvy trader can find optimum entry and exit points. There will be plenty of charts providing greater confirmation when all your technical indicators are in agreement. (Read more about our newly released 30-minute training tutorial Fibonacci Trading Techniques)
Market Direction: The use of candlestick signals makes for a very powerful trend analysis tool. When do you take profits in an uptrend? That is a very difficult procedure for most investors. The emotional tug-of-war starts as soon as a trade becomes profitable. Do I take profits now to prevent this trade from moving to a loss? If the stochastics are now in an overbought condition, is that the right time to take profits? What would I feel like if I sold now and the prices went higher? These are all questions that come to the forefront as soon as a price starts to move positive. For most investors, the emotional decision-making process enters the picture based upon the profitability or loss of an established position versus what the chart pattern is revealing.
What is usually the major factor for analyzing a price trend? Which direction are the market indexes moving! Most investors want to know which direction the market is heading. This is logical, most boats raise or lower based upon the direction of the tide. Obviously, most stocks move up in a bullish market trend, down in a bearish trend. A great cause of concern is identified when a trend will come to an end. Sometimes that is a huge reversal day like we saw on March 10, 2009. If you were short, a 379 point moving the Dow took back a good portion of your short profits.
Since that time, the uptrend has produced some excellent profits on the long side. When will that trend come to an end? There are some very simple observations that can be applied using candlestick signals that make analyzing an existing trend very easy.
Wednesday's trading showed the Dow trading down 120 points during the day. However, at the same time, the NASDAQ was only trading down four or five points. This provided some valuable information. It indicated that although some sectors may be selling off, other sectors were holding up well. The overall implication was that the markets were not experiencing selling pressure, merely shifts in specific sectors. What would be a more compelling sell situation? Witnessing both the Dow and the NASDAQ selling off hard at the same time. That would indicate the buyers were coming out of the market enmasse.
The reversal, at the bottom two weeks ago, provided indications to close out short positions very early in the uptrend. This was based upon both indexes showing a change of investor sentiment at the same time. An extended downtrend requires very compelling buy signals to indicate there has been a change of investor sentiment. That may not have been interpreted by the Dow chart below. The NASDAQ chart provided a much more clear indication. It had formed an Inverted Hammer signal the previous day. The following day, the NASDAQ gapped up on the open, confirming a candlestick reversal signal at the same time the Dow was showing the potential of a Bullish Engulfing signal in the oversold conditions. The confirmation of a candlestick signals while the possibility of another candlestick signal was forming in the other index created a much more compelling case that investor sentiment was changing.
The utilization of the simple observations found in candlestick analysis produce great opportunities. It is the opportunity to take advantage of reversals in a trend just as they are occurring. This allows for the establishment of new positions in very low risk areas. Stop loss procedures can be set at logical points where the losses remain very small. The profits have the potential of being substantial. The candlestick investor has the advantage of immediately anticipating or seeing when a reversal has occurred in its very early stages. Most other technical trading systems require additional confirmation. Their entry into the trade, upon that confirmation, adds to the profitability of being in early.
There is an aspect of the Candlestick Forum that many of the participants find refreshing. Although a vast majority of the positions produce consistent or inordinately high profits, the results are not crammed down everybody's throat with hyper promotion. The Candlestick Forum is a learning website. Investors do not become convinced that an investment strategy/system is profitable if it is constantly having to be promoted that way. The most compelling factor that convinces investors is actually experiencing the profits. Part of the learning curve is not only knowing when to identify a trend reversal, but taking advantage of that information. The serious investor is more interested in hearing how to identify the next big price move potential and how to profit from it versus hearing about how big the past gains were. Recent recommendations have produced 20%, 40%, 80% returns. The next step to the candlestick signal learning process is understanding what signals/processes make for retaining those profits.
Candlestick signals allow for simple mechanical methods for taking profits. It is easy to establish a target based upon by signals and the conditions of stochastics. To keep emotions out of play, utilizing high probability signals at the initial price target creates commonsense sell programs. As illustrated in our recommendation on SVNT, signals illustrated the perfect time to buy. They also showed obviously when to take some profits when it hit the first major target at the 50 day moving average. There is a very simple profit-taking procedure that takes the emotions out of taking profits. We will discuss that tonight in our chat session at 8 PM ET, open to everybody.
Candlestick analysis is not a new "secret" investment program being exposed for your benefit. Candlestick analysis is hundreds of years of investment perspectives built into graphic formations. Learn how to use that information correctly. It will benefit your investing process in any market and in any market conditions. There are no secrets in candlestick analysis. Fortunately, the time and effort that is put into learning this highly proven program, the benefits will be something you can utilize for the rest of your investment career. This is not difficult stuff to learn. This is merely common sense put into graphic depictions.
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