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Fibonacci Retracement

edited May 2015 in SharpCharts
Can anyone tell me if this appears to be the correct way to use the Fibonacci retracement tool?

Also, how does the Pivot Point indicator with Fibonacci differ from the Fibonacci retracement tool?



  • KevoKevo
    edited May 2015
    I would say that is not the correct way. Depends on how you use it => there are two cases: support and resistance. The purpose of the tool is to find potential support or resistance of a pullback/reaction bounce of a prior advance/decline.

    Draw from 0 to 100 in the direction of the pullback or counter-trend. This is the support case. So, if the prior trend is up, then a pullback is a downtrend. Start the 0 at the highest high of that leg. Place the 100 at the lowest low of the same leg. So 0 -> 100 is downward in the direction of the pullback. The Fib retracement attempts to forecast support by using the golden ratio because there is a lot of psychology/behavioral reasons behind it.

    If there is more than one peak and trough nearby, then you could place a fib retracement cluster (more than one).

    Pivot Points is another way of determining potential support and resistance. These two are both ways you can forecast a turning point of prices in terms of support and resistance. The two are calculated differently, but their purpose is to forecast support and resistance. Pivot Points show you both Support and Resistance. Fib Retracements show only one of the two depending on the prior trend and the direction you place it.

    It takes some time and practice to get used to Fib Retracements. I had some lingering questions about it too.
  • The setup you have now is for resistance. Lets say, you assume it is now in a downtrend. The turn in prices is just a reactionary bounce, and you expect it to hit resistance at the 50% mark or one of the golden ratios.

    My first comment above was for the support case. I'm not sure which one you mean.
  • Hi @karutunian , as Kevo says, if you are looking for a retracement of the most recent down leg, your set up is correct. 100 goes at the top of the down leg, 0 at the bottom. The first resistance level for the move back up (if there is one) would be 38, then 50 then 62 and finally 100.

    Looking for support after a rally, 100 would go at the starting point of the rally and 0 at the high.

    So, in either direction, you can think of 100 as the base of the move (the starting low of a rally or the starting high of a decline), and 0 as its leading edge.

    I don't use pivot points so I can't help you there.
  • edited May 2015
    Kevo & markd,

    Thanks guys! Yes, on that particular position I'm looking for resistance levels and essentially selling points to see what my risk/reward might be if I take a position below *38 anticipating the move back up to 38/50/62 and finally 100.
    I'm also using slow stochastic to help with my oversold (below 20) and overbought (above 80) signals.
    My concern with stochastic is that it doesn't really show me my risk/reward for taking the trade. I needed something to help illustrate the risk/reward.

    When I'm following a stock that's in an uptrend and has a pullback but doesn't breach the 38 line of support...the stock is still officially in an uptrend right?
    As a rule, I'm thinking a normal pullback for an uptrend stock is the 50 level...would you agree? I'm guessing that's around the area where I'll also pick up the stochastic signal nearing the 20 line. If it breaks the 50...that should push stochastic well into the oversold (below 20) and simply wait for the cross to take the position. Sound like a good plan? :smiley:

    BTW, I'm using DAILY charts. So, a bit longer term time periods.

    Thank you again for your input!

    I just put the fib retracement on GOGO. If I'm right, there's a trade brewing around the 50 ema...*IF the Fibonacci 50 level doesn't hold. Otherwise, a retest and bounce off the 38 would suggest a buy and should show up on stochastic.

    Would either of you take the trade at the Fibonacci 50 level or wait to see it heads down for the 50 ema or 38 on Fib?

  • Kevo, I did what you suggested and looked back a bit @ GOGO. Came up with something very interesting. The chart above in previous more of a trend within a trend.
    The one posted below gives a better picture of real support and better buy targets for a longer term trade. Cool. My type of trade is to get the price in the Fibonacci 50-62 range!
  • It's certainly a coherent and logical plan. Good luck!
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