Now we have a quick question here from a new subscriber asking how they can use something like Fibonacci retracements in their trading. So, thanks for the question.
There are really a lot of technical trading tools at a traders disposal, and even though something like Fib retracement’s are useful, keep in mind they’re not perfect, and they should never be used you know, as a crutch. You should always accompany them with other technical trading tools, like support and resistant zones, or psychological price levels, or trend lines, et cetera.
So, if you choose to build your technical trading approach by solely relying of Fib labels, that is also fine. I mean that is your prerogative as a trader, and there are certainly thousands of other traders who do the same, but as long as you know at the end of the day it’s just one of the technical tools that’s available, and shouldn’t replace, you know, good fundamental, and other technical analysis methods.
So, after that little bit of a rant, let’s quickly jump to a chart, and look at how we can use Fib retracement levels. So, the first thing to note is that there are a difference between two Fibs. You get a Fibonacci retracement level, and then you also get a Fibonacci expansion level.
Now, for this video we will focus on the retracement Fibs, as I personally haven’t really found much use for the expansion levels, even though there are thousands of traders out there that use it successfully. So, let’s jump to a quick chart, and see how we can apply the Fib and use it in our trading.
Now, the first thing I think, to understand, on how to draw a Fib, it’s very simple really, you need to ask yourself in which direction are you trading? So are you looking for a continuation move? Are you looking for a further move to the upside, after a pull back? Are you looking for a down move? And you basically need to draw the Fib in the direction in which you want to trade in.
So, if you are trading a bullish move to the upside, for example, you need to be drawing your Fibonacci retracement from the lows to the highs, and if you’re looking to trade something bearish, for example, you need to draw your Fibs from the swing highs, to the swing lows. So let’s just quickly do a practice run.
So let’s say we want to trade this move to the upside, we think the market is going to continue, and we want to look for a possible retracement level. So then you can just take out your Fib, and you can draw it from the swing low to the swing high, and that’ll obviously give you a couple of levels. Now let me just quickly add in some of the more traditional levels that you’ll see in the Fibs, just so that it looks the same on your chart. So that is what your fib will look like. So, this will give you a couple of possible levels to consider pullbacks to reengage this market with.
So, trading it to the upside, drawing it from the low to the high, then let’s say we wanted to trade this down move, for example to the downside we would draw it from the swing low to the swing high, and then we can see possible levels that we can engage the market with as possible retracements.
Now, I’ve done this on the H four, just to get some clearer chart moves, but you can obviously deploy the Fib on any time-frame that you are trading. So let’s quickly take these away, and let’s drop down to something like the M30 for example, and just show you it works the exact same way. So let’s say we wanna trade, again, this move, this swing low, this swing high, a possible retracement of that. You can just draw that, again, from the swing low, to the swing high, and that’ll give you a a couple of options that you can use for possible retracements to reengage the market with.
So, it doesn’t matter on what time-frame you’re trading. My advice would be always use it on the time-frame that you’re trading, because it can get very confusing, because you might have a Fib on the M30 that looks like this, but now you go to the H one, and now suddenly there might be another Fib that you can use, so you draw it from that one to that one, and then you go to the H four again, and there’s another swing, and another swing, and another swing. It gets very confusing.
So to get rid of all of that confusion, just trade it on the level, on the time-frame that you’re trading at. So if you’re trading it as a swing trade, use it on the H four. If you’re trading it as day trade, use it on the M30, or M15, or whatever. Don’t ever complicate it, just use it on the time-frame that you are trading in. Now, the other thing to keep in mind, is that there’s lots of levels with regards to Fibonacci retracement.
So the traditional ones are the 23’s, spot six, you got a 38 spot two, or the 38 two, 38%, you’ve got your 60, 16%, whenever we use this tool, we try to keep it really, really simple by removing some of these additional levels, and just focusing on the 50% retracement, now I can already feel the heat coming from some of the objections about that, but our aim is always to keep things as simple as possible, right?
So I’m not looking for five possible retracement levels. If I know I’ve got the direction right of the trade, I’m looking for a level that I would see value in buying from, or selling from, and if I get that level, of course, I can execute my trade. So, we prefer just having something like the 50% on there. It keeps things very simple.
You don’t need to focus on a bazillion levels. You can obviously just focus on this one level. Now, looking at something like this, as we said, don’t us it in a vacuum, right? You’re gonna have more success if you combine this with other technical methods, as well. So, let’s just take this up move that we have over here. So imagine that we didn’t have, you know, we haven’t seen that part of the market yet. So we were at that stage, and we used the Fib, you know, with that swing low, and that swing high, and now we’re looking for a possible area to reengage the market with.
So, apart from just using the Fib, try and use other technical tools to your advantage, right? So, just basic, basic support and resistance training will tell you that that previous resistance should act as support at some time. So that gives you a possible level to look at. Then just looking at the right hand side, you also have that psychological level coming in at the 12, 50. So now I can say, okay, this overall zone, between the 12, 50, and let’s say a little bit to the upside, that can give me a possible area to look for.
Now looking over to the Fib we can see okay, that the 50% retracement was actually a little bit higher, coming in at 12, 80. So that gives you an overall zone, so to speak, that you can look for to give you an opportunity to reengage the market to the upside with, and I mean, you can use that on the higher time frames, as well. Let’s do a quick example of this on the H four.
So, we go to the H four. We say, okay, we want to trade this to the upside, so we can pop in our Fib retracement there from the low to the high, and now we can start again. Okay, we’ve got our 50% retracement. Do we have any other confluence at that level to consider the market to pull back to, you know, that’ll find whether the market will want to pull back to that?
So we can look and say, okay, on the left-hand side, we have a couple of psychological levels, they have the closest one to that 50 is the 11, 50, so let’s go pop in the 11, 50. Just making sure it is on 11, 50, and now we can go, and see whether there’s any other evidence for possible support coming in downside. Now, just by having it very quickly, we can see the previous high was obviously 27th of March, coming in right on top of that 11, 50, so, that is a very attractive level. Going back in history, it was respected to some extent, but it was a little bit of a wider range.
So what we could do is we could include most of these tops, and these bottoms, and that gives us an overall, again, range or zone that we can look to use that Fib with in line with the other technical tools that we have on the chart already. So, I hope that answered the question on how you can use it.
The question is to always ask yourself, in which direction am I trading in? If I’m trading it to the upside, I need to draw the Fib in the direction that I want to trade in, if it’s a down move, it’s gonna be from the swing high to the swing low. If it’s an up move, it’s gonna be from the swing low to the swing high, and again, don’t use it in a vacuum.
Try and use additional technical methods to your advantage. Try and really and get those very best technical entries and exits for your trading.
So I hope that helps, any other questions on this, please don’t hesitate to let us know.