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Number of messages : 9
Points : 1657
Date of Entry : 2015-05-21
Year : 44

ma1 Understanding and Using Fibonacci Retracements

on Tue May 26, 2015 12:45 pm
Part1

Who is Fibonacci?
He was a very famous 12th centurymathematician; credited with, among other things, bringing to light an extremely valuable series of numbers used for complex problem solving called the Fibonacci sequence.
We care because the Fibonacci retracement calculations are based on this famous number sequence. If you are interested in more details about the Fibonacci number sequence, please refer to Wikipedia or do a general Google search. 

What are retracements?
Retracements are price movements in the opposite direction of the trend. For example, the GBPUSD pair was in a downtrend from September19th to October 3rd and along the way there were retracements (up moves).

GBPUSD 1 hour chart – Sept 18th to Oct 3rd, 2014
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Why do we care?
Because the up moves (retracements) in a downtrend are excellent opportunities to put on a sell trade (a trade in the direction of the downtrend in this example).

How do we know when the retracement is likely to be over so that we can sell at an opportune moment and price?
This is where the Fibonacci retracement levels come in.

What are the Fibonacci retracement levels?
Percentage retracements of the trend based upon the Fibonacci number sequence; the most popular are 38.2%, 50%, and 61.8%. Traders draw them on the chart each time a trend retracement appears to be occurring. For example, the downtrend in the GBPUSD pair between September 19th and October 3rd has four significant retracements and a fifth retracement (far right of the chart below) might possibly be coming soon
 
GBPUSD 1 hour chart – Sept 18th to Oct 3rd, 2014
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How are these Fibonacci retracements useful?
Traders use the 38.2%, 50%, and 61.8% retracements to put on trades in anticipation of the trend resuming. For example, the GBPUSD pair’s retracements between September 19th and October 3rd were as follows:
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As the far right column of the schedule above indicates, the GBPUSD pair retracement percentages were 56%, 47%, 59%, and 71%. What that means is this: If you sold after a 38% retracement, you would have successfully sold on the move up before the down move resumed, in all four instances. If you waited to sell the 50% retracement you would have sold on the move up before the down move resumed in 3 of 4 instances. You would have missed selling in instance [You must be registered and logged in to see this link.] when the retracement was only 47%.
How to prepare to sell the next Fibonacci retracement ([You must be registered and logged in to see this link.])
At some point the GBPUSD pair will begin to move higher. When this happens add the 38.2%, 50%, and 61.8% Fibonacci retracements. Each of these retracement levels will have a corresponding price point, which for you is a possible sell price point.
For example, let’s assume the GBPUSD pair started to increase after reaching the 1.6065 low. Using the Fibonacci drawing tool software (all trading platforms have it) we can add the 38.2%, 50%, and 61.8% Fibonacci retracements:
•  The 38.2% Fibonacci (FIB) retracement is at 1.6136. If you wanted to sell the 38.2% Fib retracement, you would sell when price reached 1.6136. To do this you would simply put in an order to sell when the price is reached.
•  The 50% Fib retracement is at 1.6158. If you wanted to sell the 50% Fib retracement, you would sell when price reached 1.6158.
•  The 61.8% Fib retracement is at 1.6179. If you wanted to sell the 61.8% Fib retracement, you would sell when price reached 1.6179.
 
GBPUSD 1 hour chart – Sept 18th to Oct 3rd, 2014
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Certainly there are still many unanswered questions, such as:
1.  What about the stop loss and the take profit?
2.  Can we use other technical indicators to confirm it’s a good trade to take?
3.  What about factoring in the news?
4.  After the price reaches the Fib retracement level, can we wait for the price to start declining to be sure it’s a good Fib level to sell?
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