Description: Out of the many Fibonacci trading tools available to today’s traders, the most popular and effective one is perhaps the Fibonacci retracement tool that works for both short-term as well as long-term trading.
The Fibonacci retracement levels are derived straight out of the Fibonacci sequence
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610…….
where every number in the series (starting from 1) is derived by adding the previous two numbers.
Some of the most important Fibonacci retracement levels used in trading are 23.6%, 38.2%, 61.8% and 161.8%. Apart from these, the 50% retracement level is also considered as an important level as according to the Dow Theory, the halfway point of the previous advance or decline is an important level to watch for trend changes.
Let’s now have a look at two effective Fibonacci retracement trading strategies to boost up your trading performance.
Strategy #1 – Fibonacci Retracements + Support & Resistance
One of the most effective and time tested methods to use the Fibonacci retracement tool is to combine it with simple support or resistance levels. The Law of Polarity states that once a resistance level is broken, it tends to act as a future support zone. Similarly, once a support level is breached, it acts as a future resistance zone. Combining Fibonacci retracements with these support and resistance levels is a sure shot recipe to boost up your trading results.
In the above chart of Tata Steel, we can see how the old resistance once broken acted as a support level. We can also see that this level coincided with the 61.8% Fibonacci retracement. This formed a very strong support zone for the scrip and the stock bounced sharply off this level and continued its upward journey thereafter.
Strategy#2 – Fibonacci Retracements + Trendlines
Our next Fibonacci retracement trading strategy involves combining the sacred ratios with trendlines.
We all know that prices tend to trend and they often do so in a particular angle or stride. Once we have identified this trend, improving the odds of success just becomes a second nature. Combine that with Fibonacci retracement levels and you have a winning trading strategy in place.
In the above example of Larsen & Toubro, we can see how prices bounced off the up sloping trendline which also coincided with the 61.8% retracement level providing a nice confluence support zone.
Fibonacci retracements are very powerful in identifying zones of support and resistance. Combine them with trendlines or support and resistance levels and you have a very high probability low risk trade setup in your hands.
May the power of the sacred ratios be with you!
To know more on various other proven and time tested advanced trading strategies please consider attending our Qualified Market Trader stock market course.