Learning Fibonacci Trading (Part II)
Fibonacci Price Retracements: The important question in every trades mind is how far the retracements will penetrate into the previous movement. Suppose the price action bounces back from a resistance level down. How do you identify a possible support level once the market pulls back from a high? Fibonacci price retracements are run from a prior low to high swing using the ratios 0.382, 0.50, 0.618 and 0.786 to identify possible support levels as the market pulls back from a high.
Retracements are also run from a prior high to low swing using these same ratios looking resistance as the market bounces from a low. Most basic technical analysis software will run the Fibonacci retracement levels for you when you choose the swing you want to run them from.
If you want to understand how to calculate the Fibonacci price retracements yourself, multiply the length of the swing (from low to high or high to low) by the retracement ratios and then subtract the result from the high if you are running low to high swings or add the results to the low if you are running high to low swings.
Fibonacci Price Extensions: Fibonacci price extensions are almost similar to the Fibonacci Price retracements in that they are run from the prior lows to highs or from prior highs to lows using only two data points to run the price relationship.
What is the difference between the Fibonacci Price Extensions and Fibonacci Price retracements? The difference between the Fibonacci price extensions and the Fibonacci price retracements is that we are running the relationship of a prior swing that are less than 100% or retracing the price move whereas with the extensions we are running the relationships of a prior swing that are extending beyond 100% of it.
These two techniques are named differently to indicate whether the price relationship is occurring within the prior swing or extending beyond it. Fibonacci Price Extensions are run from prior low to high swings using the ratios 1.272 and 1.618 for potential support. They are run from prior high to low swings using the ratios 1.272 and 1.618 for potential resistance.
Fibonacci Price Projections: We use 1.00 and 1.618 ratios to run the projections. Fibonacci price projections are run from three data points and are comparing swings in the same direction. They are run from a prior low to high swing and then projected from another low for possible resistance or they are run from prior high to low swing and projected from another high for possible support.
What are Price Clusters? Price clusters identify key support and resistance zones that can be considered to be trade setups. A price cluster is the coincidence of at least three Fibonacci relationships that come together within a relatively tight range.
A price cluster can also develop with a coincidence of more than three price relationships. Three is just the minimum number required to meet the definition. You may see five to ten price relationships come together in a relatively tight range. There are times when you see these large clusters develop not too far from the current market activity and they tend to act like a magnet for price.
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Know Forex Rebellion!
categories: forex,stocks,mutual funds,trading,investing,finance,stock market,wealth,retirement,options,day trading,commodities,futures,money
Tags: Currency, Day Trading, Fibonacci, Forex, Forex Signals, Lows, Price Move, Price Relationship, ratios, Relationships, Resistance Level, stocks, Swing, Swings, Technical Analysis Software, tradesPosted in
