Using Fibonacci retracements and extensions to foreshadow resistance and support lines of a particular security is a very effective and accurate trading technique.
However, as with any indicator, Fibonacci retracements and extensions can be used on their own, but the best results are often obtained by using the indicator in conjunction with another indicator or by understanding how to use the indicator through a series of established tricks.
By using some well-known skillful tricks, a trader can confidently use Fibonacci retracements and extensions to enter and exit the market at times when the price is highly likely to behave in a particular way.
Fibonacci retracements and extensions are known throughout the trading world for being excellent predictors of a security’s support and resistance lines.
On countless occasions, these pullbacks and extensions have proven to be accurate and consistent and that is why they are among the most valuable tools available to the modern trader.
However, the use of Fibonacci retracements and extensions exclusively for these media can be considered limited in terms of broader potential.
The Fibonacci sequence can be used in a number of creative ways to help predict other movements within the market and these are also equally reliable in providing the trader with detailed information on where to enter and exit the market.
A particularly useful strategy when using Fibonacci retracements and extensions is the congestion strategy.
For this to work effectively, a trader must accurately pick the high and low price points and must correctly place a Fibonacci retracement pattern over the top of a candlestick chart. Once this is successfully accomplished, the congestion strategy can be implemented.
This strategy works on the basis that, at various times, there is often a price movement congestion between the proportions of 38% and 62%.
When this congestion increases, the price of a security will often bounce back and forth between these two indices and when this is observed, a trader can accurately predict that a major breakout is about to occur.
By using the right strategies and taking advantage of evidence from other indicators, a trader can take advantage of this price breakout and potentially make a big profit when it occurs.
Another useful trick when applying Fibonacci retracements and extensions concerns how to accurately position the indicator.
Often times, traders face problems in correctly choosing the appropriate highs and lows of a trading range, and if these are incorrect, all the evidence presented by the indicator will inevitably also be incorrect.
To avoid this fundamental mistake, traders should use a useful trick to help ensure that the correct highs and lows are chosen to ensure that pullbacks and spreads work accurately.
Often times, the absolute high or low of a trend is not the best place to start and a more accurate position would be when the price of a security has hit a high or low on more than one occasion in a congested area. This ensures that all recoil and extension are more reliable.
There is a definite art in Fibonacci trading that can be had with a very small learning curve and the reduced risk is an absolute must if you plan to trade long term.
