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Fibonacci analysis can improve currency performance for both short-term and long-term positions by identifying key price levels that show hidden support and resistance. Fibonacci, used in conjunction with other forms of technical analysis, builds a powerful foundation for strategies that perform well in all types of market conditions and volatility levels.
The monk and mathematician of the 12th century Leonardo de Pisa discovered a numerical sequence that appeared in nature and in classical works of art. While his research was theoretical, these Fibonacci numbers show profitable applications in our modern financial markets, describing the relationships between price waves within trends and how far the waves will travel before reversing and testing previous levels.
The .386, .50 and .618 correction levels include the basic Fibonacci structure found in the graphics packages, with the .214 and .786 levels adding depth to market analysis. These secondary ratios have become more important since the 1990s due to the deconstruction of the technical analysis formula by funds that want to capture traders using these criteria. As a result, shocks through primary Fibonacci levels have increased, but harmonic structures have remained intact.
For example, it was generally thought that the .618 correction would contain fluctuations in the opposite trend in a highly trendy market. This level is now routinely broken, with the .786 correction offering strong support or resistance, depending on the direction of the primary trend. Traders and market timers have adapted to this slow evolution, changing strategies to adapt to a higher frequency of shocks and disturbances.
How to draw fibonacci levels
Fibonacci supports various winning strategies, but the wrong location of the grid undermines the forecast and confidence. Traders are disappointed when they try the tool for the first time and it does not work perfectly, often abandoning it in favor of a more familiar analysis. However, consistency, precision, and little shape adjustment can generate life-long trading advantages.
Use an retracement grid to analyze withdrawals, reversals, adjustments, and other pricing actions within major uptrend and downtrend. Use an extension grid to measure how far upward or downward trends are likely to carry a breakout or breakout level. This analysis forms the basis for establishing technical target prices and profitable exit zones.
Setting retracement grids
Skills are needed to properly set up Fibonacci grids and choose the wrong levels, as start and end points undermine profitability by encouraging the purchase or sale of prices that make no sense. The process also requires the placement of a multi-trend grid, with successive levels set over longer and shorter time frames, while capturing price ranges that can take effect over the life of the open position.
Start setting up the grid by reducing the scale to the weekly pattern and finding the longest continuous uptrend or downtrend. Set a Fibonacci grid from low to high in an uptrend and high to low in a downtrend. Set the grid to show correction levels .382, .50, .618 and .786. The first three coefficients act as compression zones, where the price can bounce like a pinball machine, while .786 marks a line in the sand, with disturbances signaling a change in the trend.
Now move on to shorter-term trends by adding new grids for these time frames. Once completed, your chart will show a series of grid lines that are tightly aligned or not aligned at all. Tight alignment identifies harmonic levels of support and resistance that can terminate adjustments and signal trend progress, higher or lower, especially when supported by moving averages, trend lines, and gaps. Loose alignment points to disorganization, with conflicting forces generating shocks that reduce predictable strength and profit potential.
Delta air lines 60-minute retracement grids
Fibonacci grids work equally well in upward and downward trends and in all time frames. In the chart above, Delta air lines, sells between $ 48 and $ 39 in two different waves. Placing a grid on the long- term decline highlights crucial positions of harmonious resistance, while stretching a alternate grid on the last wave of trades reveals hidden alignments between time frames.
The .382 correction of the longer wave (1) is closely aligned with the .618 correction of the shorter wave (2) in (A), while the longer correction of .500 is perfectly aligned with the shorter correction of. 786 in (B). The rebound from the low level of June gathers in the lower line (A) and stops for seven hours, which leads to a final explosion in the upper line (B), where the rebound ends.
Setting extension grids
Expansion grids work best when the ratios are made up of trading ranges that show clearly defined levels of withdrawal and breakout. For an uptrend, start the expansion grid from the low swing in the range and expand it to the breakout level, which also marks the highest value in the range. Click once to install this grid and a second grid will appear. Start this network from the breakout price by stretching it higher until it includes the Fib odds that are likely to take effect during trading.
Reverse this process for a downtrend, starting with the highest rotation and extending it to the breakout level, which also marks the bottom of the range. Click once to install this grid and a second grid will appear. Start this network from the breakdown price by stretching it lower until it includes the Fib odds that are likely to take effect during trading. Downward grids are likely to use fewer ratios than inverse ones, as extensions can be extended indefinitely but not below zero.
Apple weekly extension grid
Apple Inc. ended a historical uptrend (B) and entered a long-term trading range, reaching the bottom of (A). It builds up to the range resistance after two years and explodes, allowing the technician to build a weekly extended network using the low (A) and high (B) trading ranges. The proportions constructed from this 46- point swing (101-55 = 46) show a harmonious resistance at$ 130 (.618),$ 145 (1.00) and$ 173 (1.618). The stock peaked a few months later, just before the Fibonacci .618 expansion, and sold to $ 101 to test breakout support.
Fibonacci grid applications can be roughly divided into two categories, historical analysis and preparation for trading. The first category requires a study of long-term currency trends, identifying harmonic levels that have caused major changes in the trend. Active market participants will spend more time focused on the second category, in which Fibonacci networks are placed on short-term pricing actions to build entry and exit strategies.
There is great synergy between the two applications because the price levels revealed by long-term historical analysis work well with short-term trade preparation, especially at key breaking points. As currency pairs fluctuate between limited limits across almost all economic conditions, these historical levels can affect short-term pricing for decades.
Given the small number of popular crossovers compared to stocks or bonds, it makes sense to perform a historical analysis of each pair, outlining the main trends and levels that may come into play in the coming years. Complete this task by reducing the scale to weekly or monthly charts and placing grids on secular bull and bear markets. The analysis should be performed only once, as long as the price action does not exceed the peaks or lows of long-term networks.
The EURUSD currency pair revived close to .90000 in the 1980s and traded at 1.42890 in 1995. It fell to its lowest level at .82300 in 2001 and rose to its highest level from 1.60380 in 2008 above the massive upward trend has covered all price actions in the last eight years. The initial decline from the highest rally level ended close to the .50 correction a few months later, providing support during tests in 2010 and 2012. Meanwhile, a breakthrough in 2014 found new support for the correction from. 618, with the currency pair spending 2015 bouncing at that level.
Begin your trading specific analysis by placing a single grid on the biggest trend of the daily chart, relating crucial turning points. Also add grids at shorter and shorter time intervals, looking for convergence between crucial harmonious positions. Like trend lines and moving averages, the strength of these levels tracks the relative time frame, with long-term trend networks creating stronger support or resistance than short-term trend networks.
Many forex traders focus on day trading and Fibonacci levels work in this place because daily and weekly trends tend to split naturally into smaller and smaller proportional waves. Access these hidden numbers by stretching networks between the trends of 15-minute and 60-minute charts, but first add daily levels because they will dictate big turning points during the 24-hour day of forex trading.
Difficult to figure out where to put start and end points for Fibonacci networks? Stretching the net through high highs and lows works well in most cases, but many traders use a different approach, using the first lower peak after a large high or the first higher minimum after a base bottom. This approach traces Elliott’s wave theory, focusing on the second primary wave of a trend, which is often the longest and most dynamic.
Interaction with other indicators
The reliability of the correction levels for stopping price fluctuations and starting profitable fluctuations is directly correlated with the number of technical elements approaching at or near this level. These elements may include Fibonacci retracements in other time periods, moving averages, trend lines, gaps, previous highs / lows, and relative strength indicators hitting extreme overbought or oversold values.
For example, multiple daily chart grids that align the .618 correction on one trend with the .386 correction on another trend increase the chances of a currency pair turning around or near that level. Add a moving average of 50 or 200 bar and the odds increase further, encouraging larger positions and a more aggressive trading strategy. This methodology also applies to exits, telling forex traders to take profits when the price reaches an adjustment level that shows multiple adjustments.
The EURJPY forex pair sold out from 133.75 to 131.05 in just six hours, creating a vertical trend that offers a perfect fit for introducing Fibonacci correction on the short side. The counter-trend wave crawled higher for four days, finally reaching a .618 sell-off correction at the same time as the 200-bar EMA dropped to the same price level, in close line. This increases the chances of the pair declining in a winning short sale. The next decline rejects nearly 70% of the wave of the counter-trend.
The bottom line
Add long-term Fibonacci grids to your favorite currency pairs and watch price action close to popular correction levels. Add shorter-term grids as part of your daily trading preparation, using alignments to find the best prices for entry and exit positions. Add other technical indicators and look for convergence with retracement levels, increasing the chances of prices reversing in the event of profitable fluctuations.
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