New Members: Be sure to confirm your email address by clicking on the link that was sent to your email inbox. You will not be able to post messages until you click that link.
Correct way to use Fibonacci lines
What is the correct way to use Fibonacci lines? Uptrend / Downtrend
I get so confused on this subject I not able to formulate a question. I have read the information from StockCharts.com and I understand the mathematics, just don't understand the application. I guess when you try to put a round peg in a square hole you can expect this type of problem.
Anyway, your help would be appreciated.
All the Best,
Start with any bar that fits the definition of a low or high (as described in my previous entry). As the next bar prints, extend the grid if the new bar exceeds the zero line, or look for a retracement to a grid line (23, 38, 50, 62, 78) for a possible entry. If you get the retracement, look for reversal behavior (e.g., a doji below the 38 line, closing above the mid point, then consider an entry back above the 38).
For instance, starting from a low, imagine a long body up close prints on good volume. Draw the fib from the low to the high.
Next bar is another long body up, also on good volume. Extend the grid up. Note to the left that we have crossed an up close in the previous down leg. That could be support if we come back to it.
Next bar is a down bar closing below the 23 on smaller volume. Not an entry because we haven't seen reversal behavior (but if the market is very strong - no wicks, good range and volume to the up side, few second down closes, buyers are not waiting for reversal behavior, so it could be an entry - but for this example let's say they are waiting).
Then another down bar with a small tail closing below the 38 with a little more volume. Some evidence of buying, maybe.
Then a doji with a longish tail closing up but below the 38, on weak volume. That's reversal behavior. Looking left we are just above or below the crossed up close in the previous down close (so there was buying interest at this level before).
Next bar opens up, moves above the 38 and volume is good. It appears to confirm the reversal behavior, so that's a possible entry.
Any entry can fail - good reversal behavior and follow through do NOT guarantee a successful trade, but the odds are better.
This can work on a daily chart, too, maybe even weekly, on stocks that aren't too choppy. Holding overnight can be a problem on charts that gap a lot.