When trading, the most important piece of information is: Where did the price action close relative to yesterday’s close? In the case of the red candle left chart , it appears to be a red day. But in fact when compared to the previous session’s close, it was a green day. This is obvious in the case of the green candle because the fact that the candle is green means that it closed higher than the previous day’s close, even though it is filled in signifying that it closed lower than its own open. See for the explanation of how to read the candles on the candlesticks with trend charts. Many traders and analysts disregard fibs entirely, as there are many traders who keep redoing in their fibs until the chart shows them what they want to see. By redrawing I mean choosing different highs and lows to measure until magically, the fibonacci line up with the trader’s analysis.
While this complaint is valid, knowing that fibs indicator are only another indicator of many and that nothing works perfectly every time can give a trader enough confidence to use them effectively. There are many retail trading platforms that don’t give data for more than ten or twenty years back in time. When you see the AUD/USD at all-time highs on your platform only able to see back to 1990 , be aware that this pair has traded much higher than now back in the 1980’s. In this case, using Fib extensions can be very helpful.
Traders can use Fib retracements on larger time frames to determine supply and demand areas, and on smaller time frames to help see join a trend in progress. Using the Fib extensions can help traders determine targets for possible profit taking. While previous supply and demand will be more effective than mere Fib extensions to determine exits, when we don’t have/see previous supply and demand, these measurements are one of the only tools we have to set our targets. So what are the Fib extensions to use? Because I prefer the “Big 3” retracement percentages of 38.2, 50, and 61.8, use the 138.2, 150, 161.8, 200, 238.2, etc., just adding a 1,2,3, to the Fib retracements to find the more common extensions. Are there more Fib levels available? It then comes down to a trader’s preference on how many lines you want to see on the chart. If you threw in every possible combination of retracements plus measurements from different price swings, it would be nearly impossible to see the actual price action!
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About the Author
Fibonacci retracement lines with extensions from the swing high of 1.4963 to the swing low of 1.4308. The extensions show up above the swing high.
Tags: all time highs, candlestick charts, candlesticks, demand areas, highs and lows, investing, retail trading, retracement, time frames, trading platforms, trend charts