In an uptrend, the general idea is to go long the market on a
retracement to a Fibonacci support level. The price retracement levels
can be applied to the price bar chart of any market by clicking on a
significant Swing Low and dragging the cursor to the most recent
potential Swing High and clicking there. This will display each of the
Retracement Levels showing both the ratio and corresponding price
level. Let’s take a look at some examples of markets in an uptrend.
The same points made by these examples are equally applicable to
markets in a downtrend.
Here we plotted the Fibonacci Retracement Levels by
clicking on the Swing Low at about $71.31 and dragging the cursor to
the Swing High at about $89.83. You can see the resultant levels
plotted by the software. Now the expectation is that if the market
retraces from this high it will find support at one of the Fibonacci
Levels, because traders will be placing buy orders at these levels as
the market pulls back.
Now let’s look at what actually happened after the
Swing High occurred. The market pulled back right through the 0.236
level and continued the next day through the 0.382 level before
finding support. After a few days, the market resumed its upward
move. Clearly buying at the 0.382 level would have been a good short
term trade.Again, the Fibonacci Retracement Levels were plotted on
the chart in the same manner as described in Example 1. Again, we
are looking for the market to retrace from the Swing High and find
support at one of the Fibonacci levels.
Now let’s look at what actually happened. The market
again pulled back right through the 0.236 level and continued to pull
back until it found temporary support at the 0.50 level (a lot of buyers
at this level). However, once the buying power was exhausted, the
market continued to retrace all the way down to the 0.764 level before
resuming its upward trend. In this case, buying at the 0.764 level
would have been a good short term trade.