How to Use Fibonacci to Find Entry and Exit Points
11/12/2009 12:01 am EST
Tuesday’s intraday price action gave me a chance to show you two specific Fibonacci retracement grid examples of how to use the “Fibonacci Retracement” tool to find potential trade entries or reversals in price. Let’s take a look at them and learn how to use this tool.
When you draw a Fibonacci retracement grid, you are trying to answer the following question: “How far will price retrace and then reverse in the opposite direction?”
We don’t draw Fibonacci grids for the fun of it, but always for a specific purpose and always after we discern that a strong price swing has completed, and we want to enter a trade, but we don’t know where price might reverse, giving us the lowest risk entry.
Fibonacci retracement grids can help answer that question - but like anything - no tool is 100% accurate or effective all the time. It’s just a helpful tool.
Obviously hindsight is great, and we can see what happened in the future, but try and pretend we can’t as you study this chart.
Price made a move to new lows on the session and then began to head higher.
Maybe you saw this as a bear flag and wanted to do one of two trading strategies:
1. Trade long (buy) to play for as much of the retracement as you can.
2. Wait to find a spot where price is going to reverse and then start heading lower, and you want to enter as close to that reversal point as possible.
A Fibonacci retracement grid can help in both cases.
Starting with the “impulse” high and then drawing to the “impulse low (which could have been done around 10:30 CST if not shortly thereafter), your software will provide the 38.2%, 50.0%, and 61.8% retracement levels as horizontal lines.
Price could reverse at any of these levels, but it’s generally better to treat these as a “zone” as opposed to waiting to see exact price reversals… though sometimes we do get precise turns within pennies of one of these zones (which never ceases to amaze me).
In the first example, price rose to the 50% retracement level and then formed a strong bearish candle in advance of collapsing to a new low on the session. Again, this grid could have been drawn in advance of this reversal in price.
On the second example, we have an upward impulse and then we want to know how far down price might retrace before reversing.
This retracement was deeper, finding support finally at the 61.8% retracement on two candles that formed long lower shadows (that’s generally bullish).
In both cases, the Fibonacci grid helped us with trade entry, exit, and expectation. It takes about 20 seconds to draw a Fibonacci grid and each 5-minute bar is composed of 300 seconds.
I used this grid as a “teaching moment” in today’s “Idealized Trades” report, in which I share “teaching moments” like this to open your awareness to different intraday trading strategies using the examples that occurred in that day’s trading activity.
It’s a great way to follow-along and learn these concepts in more detail and broaden your awareness of professional trading strategies and techniques you can learn and apply in real-time.
By Corey Rosenbloom of AfraidToTrade.com