Fibonacci Tools for Trading Strategies

Oct 5, 2024

Fibonacci in Trading

Introduction

  • Overview of Fibonacci tools in trading: retracements, expansions, extensions
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Fibonacci Retracements

  • Definition: A retracement is a pullback or correction against the main trend.
  • Bullish Trend: Characterized by higher highs and higher lows.
  • Retracement Characteristics:
    • Retracement is smaller compared to the impulsive waves in the trend.
    • Prices move in waves (upward wave larger than corrective wave).

How to Use Fibonacci Retracement Tool

  1. Identify Impulsive Move: Determine if there's a bullish or bearish impulsive move.
    • Impulsive Move: Quick, volatile movement covering significant distance.
    • Example: Bullish impulsive move vs. bearish impulsive move.
  2. Application:
    • For Bullish Impulse: Start at low and connect to high.
    • For Bearish Impulse: Start at high and connect to low.
  3. Settings: Ensure Fibonacci levels are visible in settings; preference for percentages.

Example Analysis

  • In a bullish trend, a trader may enter at the 23.6% level after a retracement, setting stop loss accordingly.
  • Types of Bullish Trends:
    • Trend with small retracements uses higher Fibonacci levels (e.g., 23.6, 38.2).
    • Trend with deeper retracements uses lower Fibonacci levels (e.g., 61.8, 78.6).

Fibonacci Expansions and Extensions

  • Similarities: Both based on impulsive waves, but different focus (retracement vs. continuation).

Fibonacci Expansions

  • Purpose: Measure potential levels if price continues beyond the impulsive wave.
  • How to Measure:
    1. Start with low for bullish, high for bearish.
    2. Connect to high/low and back to low/high, respectively.
  • Use Case: Traders may set price targets based on expansion levels (e.g., 127.2% level).

Fibonacci Extensions

  • Difference from Expansions:
    • Connect to the bottom of the corrective wave instead of back to high/low.
  • Common Levels: 38.2%, 61.8%, 161.8%.

Conclusion

  • Fibonacci tools are useful for identifying potential entry and exit points.
  • Traders should combine Fibonacci tools with other strategies for better effectiveness.
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