Retracement is a when a stock pulled back from a bull trend. If the trend is strong enough, this is usually a good time to pick up some shares of the stock. The short term trend is pulled back, but the long term trend is still up.
Fibonacci Retracements
In technical analysis theory, when a stock temporary retraced from an uptrend, it will find a support at the Fibonacci numbers. The popular support levels are 61.8%, 50% and 38.2% from the stock’s peak price. These support levels are bullish reversal signals and technical traders use these levels as buy entries. As soon as stays drop to those levels, you will see many traders load up shares. However, if these levels are broken, then you should get out soon.
How to trade Fibonacci Retracements?
Fibonacci Retracements work just like any other technical indicator. You should always set a stop loss if you are betting for the stock to reverse it’s current trend. If you are a conservative trader, then you should always wait for confirmation signals. For example, when a stock pull back 38.2% to the first support, you wait a couple days and make sure the stock price is able to stay above that price and set a stop loss right below the support line.
Set Stop Loss at 2 decimal points.
Please make sure your stop loss price isn’t a whole number, always set your stop loss to a decimal points. The reason is most people set a stop loss at those numbers such as $17, $16.8, $5.5 for conveniences purpose. Therefore these whole numbers act like a support and when stock prices reach those levels, there are usually huge sell offs and if you set your stop loss at those points, it will likely be hit. Many times, you will see stocks bounce right back after they hit those whole numbers, so you should always set your stop loss a little below these whole numbers and set them to 2 decimal points such as $16.98, $16.77, or $5.48.
Software to draw Fibonacci Retracements
There are software out there that allows you to draw Fibonacci Retracements right on stock charts. My favorite one is MarketClub.
This is a 2 year weekly chart and we can easily draw the Fibonacci Retracement on the chart. The peak price is around $26, and it shows the price for 61.8%, 50% and and 38.2% retracement. As you can see, the stock manage to stay above the 38.2% line after it pull back from the peak price. The stock hit the 38.2% two times and bounce back so 38.2% act as a support. Fibonacci Retracements work pretty well with any time frame, so you can set the chart to daily, weekly, monthly, or intraday charts such as 10 minute, 5 minute or even 1 minute chart. You can do all these with the software.
Click here to visit MarketClub if you want to learn more about this software.
Free Ebook on Fibonacci
If you want to learn more about Fibonacci Trading, you can get a free ebook “Learn How You Can Use Fibonacci to Improve Your Trading”. The following topics will be covered in this ebook.
The Golden Spiral, the Golden Ratio, and the Golden Section
How to use Fibonacci Ratios/Multiples in forecasting
How to identify market targets and turning points in the markets you trade
And more!
Click here to download this free ebook.
