Firstly, you should only draw a Fib retracement level when there is a trend. All trends have to retrace in order for the above definitions to be true i.e. in an uptrend price has to pullback from a HH to make a HL. You are always looking for a retracement of the current trend which ensures you have momentum behind the move. If there is no clear trend then by using Fib retracements you are swimming against the tide even before you even begin. Fib does not work in ranging markets! The nature of a ranging market is that it will range between two levels, hence pulling back around 100% of each prior move.
Now that you are trading with the trend, you should start your Fib line from a HL within an uptrend or a LH within a downtrend. Refer back to Figure 2. Each HL was a possible start point for your Fib line. You should draw it upwards in the direction of the trend. Equally, in Figure 3, each LH was a place to start a line from and draw downward in the direction of the trend.
The most important place to start from is:
- The most recent low within a current up-trend.
- The most recent high within a current down-trend
Remember the above points as they are the most crucial steps in applying Fib correctly. This will ensure that you are only looking for retracements of the current trend in the timeframe you are trading. For example, look at figure 3. We have now reversed the downtrend and are uptrending (made a HH & HL) so there is no point drawing a Fib line downwards any longer. In fact, if you were to draw a line on this chart right now, the only place to do it would be with the uptrend from the last LL up to point A.
Where the Fib line should End
This is the part where people most often get it wrong. There are highs and lows all over the chart so which one do you use? The answer is in fact very simple: The line should always end at the extreme i.e.:
This is the part where people most often get it wrong. There are highs and lows all over the chart so which one do you use? The answer is in fact very simple: The line should always end at the extreme i.e.:
- The most recent HH within an uptrend or;
- The most recent LL within a downtrend
Hence, if there is no trend there is no Fib retracement to be drawn. Also, once a new high or low has been made (a new extreme) new fib lines need to be redrawn, your old ones are now completely invalidated as you would no longer be looking at a retracement of the current trend. Look at Figure 4 for an example. You MUST draw your fib line as shown from point D (the most recent high) down to point E (the most recent low or the extreme). There is no point drawing a line from C down to X2 any longer. X2 was a valid low when it was the extreme, however now a new low has been made at E and this is the ONLY point where Fib Lines should end.
caption: Figure 4
To confirm:
To confirm: Short term move
• Within an UP trend, you MUST always draw your Fib line starting from the most recent low and finishing at the most recent high
• Within a DOWN trend, you MUST always draw your Fib line starting from the most recent high and finishing at the most recent low
• Both of the above are what I refer to as the ‘Short-term Move’
• Within an UP trend, you MUST always draw your Fib line starting from the most recent low and finishing at the most recent high
• Within a DOWN trend, you MUST always draw your Fib line starting from the most recent high and finishing at the most recent low
• Both of the above are what I refer to as the ‘Short-term Move’
Long term move
All Fib lines must ‘end’ at the same point, you can however ‘start’ from different points, drawing to the same end point. This is what I will refer to as the long-term move. This is how we locate clusters and is also how we start to build a high probability entry point…
All Fib lines must ‘end’ at the same point, you can however ‘start’ from different points, drawing to the same end point. This is what I will refer to as the long-term move. This is how we locate clusters and is also how we start to build a high probability entry point…
Locating clusters of Support and resistance
Again looking at Figure 4, we know that the line has to be drawn from D down to E as this makes sure we are only trading a pullback of the current trend. This however leaves us with four potential retracement levels. To define a potential entry point, we must look to see if any Fib retracements cluster at the same level. To do this, you must use a different start point for your Fib line and finish at the same end point. See Figure 5 which shows the same chart as Figure 4, however this time we are drawing a second Fib line from a different start point, C, and finishing at the same end point, E. Note that the 38.2% for the larger move down (C to E) overlaps with the 50% of the short term move (D to E). This is what is referred to as a Fib cluster and become a much higher probability turning point if the price reaches there.
Again looking at Figure 4, we know that the line has to be drawn from D down to E as this makes sure we are only trading a pullback of the current trend. This however leaves us with four potential retracement levels. To define a potential entry point, we must look to see if any Fib retracements cluster at the same level. To do this, you must use a different start point for your Fib line and finish at the same end point. See Figure 5 which shows the same chart as Figure 4, however this time we are drawing a second Fib line from a different start point, C, and finishing at the same end point, E. Note that the 38.2% for the larger move down (C to E) overlaps with the 50% of the short term move (D to E). This is what is referred to as a Fib cluster and become a much higher probability turning point if the price reaches there.
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