When studying how to place trades in the direction of the trend many traders focus on the four most common indicators used by technical traders. However, by adding Fibonacci to your trading , not only can you locate future targets for stops and exits but you can also find triggers to improve your forex trading results in as little as two steps.
Every trader wants to find high probability set-ups. Naturally, we feel that trading in the direction of the overall trend is the best way to put the odds of success in your favor. Beyond trading in the direction of the dominant trend there are a few tools that you can use to help you find specific entry and exit targets. In short, Fibonacci numbers or ratios are mathematically significant numbers that occur throughout nature and often in financial markets. They were discovered by Leonardo de Pisa in the 13 th century and he was known as the most talented Mathematician in the middle ages.
The most important number or ratio is the There is also a 1. From a trading perspective, the most commonly used Fibonacci levels are the In a strong trend, which we always want to be trading, a minimum retracement is around The most important thing to know is that the base of the trendline should be drawn from left to right. An important note about using any trading metho dology is that neither you nor I can guess with perfect accuracy a future move.
So the next best thing is to watch closely levels of support and resistance. Once you notice a strong move off of support in an uptrend or resistance in a downtrend then you can use further levels of resistance as price targets. Therefore, in a prevalent downtrend, because you drew from left to right and top to bottom, you are looking for resistance being honored and move back to the downside. First and foremost, you want to focus on trading in the direction of the trend of the chart you are trading on.
An easy way to think of Fibonacci extensions vs. To find an extension level on a new downtrend you would run the low to high extension for possible support. Reversely, on a new uptrend, you would run the high to low extensions for possible resistance that can act as profit targets. The levels most commonly used are the 1. Expansions or Price Objectives are different than Extensions even though they sound similar.
For potential resistance or buy targets, you would draw from a major low to a major high back to a major low to get resistance. For potential support or selling targets you would draw from a major high to major low back to another major high from left to right. The common levels used for expansions are 0. Fibonacci Expansions and Extensions can be great leading indicator of price targets once a Retracement level is honored.
Deciding which tool to use is a personal choice for price targets as both methods have their benefits. Because this tool is taking you into new price territory, trailing stops are recommended along with the proper trade size so that your risk is always contained.
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