Learning to Use Fibonacci Levels for Intraday Trading
01/01/2010 12:01 am EST
For MoneyShow.com readers interested in learning intraday Fibonacci methods, December 28 gave a great example of both the Retracement and Projection concept, and I wanted to share that lesson with you.
Let’s take a look at the SPY intraday chart (five-min) for December 28:
If you feel overwhelmed, let’s take it one step at a time.
Starting with the intraday high near $113, we begin both grids. We’ll start with the simpler to explain—the Retracement Grid in blue.
Starting with the $113 high and drawing down to the $112.60 low—which was also yesterday’s closing price—we draw a standard Fibonacci Retracement Grid using your software (this is TradeStation).
The Grid connecting the high and low reveals the 38.2%, 50%, and 61.8% Retracements to watch for any reversal signals (such as doji candles) as price tests (touches) any of these Retracement levels.
We see price forming three doji candles at 10:45 CST at the $112.74 level—the 38.2% Fibonacci Retracement. Traders who were long could have sold, taking profits at this level. Other, more aggressive traders might have decided to short at this level.
Price retraced one more time around 12:30pm and formed two similar upper shadow candles, which represent price rejection at a known or expected resistance level—the 38.2% level.
Ultimately, the afternoon price highs—including the close—were contained under the $112.74 level.
With that explained, let’s move to the more complicated Price Projection Tool.
As soon as price starts to form what looks like a Bear Flag, and when price breaks under the lower trendline of what you believe is a Bear Flag, you can break out your Fibonacci Extension (or Projection) Tool to determine the 100% target—or full measured move—of that potential Bear Flag.
You need a “pole” and then a “flag” in order to use the Projection Tool, and you won’t use it until price breaks under the lower trendline.
To use the Projection/Extension Tool, start with the same high, and then draw to the same low. However, instead of stopping there (like you did with the Retracement Tool), click one more time at the high of the flag—or at the upper price point near the upper trendline; in this case at the $112.75 level at 12:30 CST.
This causes your software to “project” a measured move of your “pole,” starting with the high of the flag.
Generally, you are looking for the 100% projection, which—in this case—was $112.34.
This is both a target to play for by short selling as price moves towards it, and also a spot to consider ‘flipping” and reversing, trading long if you see reversal candles at the projection target.
By Corey Rosenbloom of AfraidToTrade.com