Several Ways of Employing Fibonacci Levels
Each trader applying technical analysis has many postulates he relies on in trading. Quite often it turns out that traders do not go deep into the matter, guided by their market experience only. However, there are effective theories applied to the markets which lack substantial ground. They can be proved by statistics only. This is the kind of theories Fibonacci number theory is attributed to.
Originally, this trading instrument was used on a bull market. Traders had to plot Fibonacci retracement levels manually. The Fibonacci conception was gaining popularity. Permanent practice has revealed its many advantages.
Fibonacci levels describe the interaction between trend and countertrend markets — 38%, 50% and 62% retracement from the reverse point. As a rule, percent ratios are applied after the trend is determined. Find out the points of percent levels crossing those of price by stretching a grid over the most apparent up or down waves.
Great trading opportunities are ensured by converging patterns and retracement levels. It should be remembered that retracements are ineffective in vacuum. Keep an eye on highs, lows and moving averages to make sure a certain level is important.
The discrepancy between a retracement and a basic pattern does not result but in a market noise, not to mention an expected profit. The patterns which contain incongruous analysis aspects are not recommended to use. Such incongruity leads to numerous abrupt reversals on price charts. On the contrary, the correlation between Fibonacci levels and patterns ensures highly predictable reversals at narrow price levels.
The two examples below are to be of help to you in working with Fibonacci. Using these methods in trading is sure to make your trading profitable and convenient.
The first rise/ first fall marks 100% retracement of a trend within a certain period of time. It can be regarded as a reversal warning. 100% retracement alters the major price movement which then terminates the trend it corrects. If a previous retracement level of 38% is broken through, then the old trend can reestablish itself. Most often traders tend to use this level to open positions against the old trend, which minimizes the risk.
Find an active market instrument and start stretching a grid either from a low or high registered within the last hours of the session. Stretch a grid to the opposite direction to a low or high of the first hour of the following morning. This determines certain price waves a trader can use in order to find intra-day gaps, break-outs and break-downs. In addition, this type of grids is applied to morning gaps. Stretching across a key retracement, a gap will provide an opportunity of entry to the market with low risks at a pullback.
Another form of support and resistance trading is called the Support Turned Resistance and Resistance Turned Support trading system. How The Support Turned Resistance And Resistance Turned Support Trading System Works Sometimes when price breaks a strong level of support, at some stage in the future, price rises back up to this support level that it broke previously only to be pushed back down from that previous support level. What has happened is that the previous support level has now acted as resistance level. The opposite is also true: a resistance level broken has the potential to act as a support level when price falls down to this resistance level it broke previously. Indicators Required: none Timeframes: Any Currency Pairs: Any Rules Buy Rules: Once Resistance Level is broken, wait until price starts to fall back down to the the resistance level it broke. Different types of orders can be used to enter into a trade: for buy stop order wait until a candlestick touches the level and place your order 2-5 pips above the high of that candlestick. Buy limit orders can be placed 2-5 pips above the resistance turned support line. Or you can buy immediately at market once price hits that level. Place your stop loss 10-30 pips below the resistance turned support line if you use buy limit and market orders. For buy stop orders, place 2-5 pips below the low of the candlestick that touches that line. For take profit targets, look for previous significant swing high and place your profit targets within that. Sell Rules: Once Support Level is broken, wait until price starts to rise up to the the support level it broke. Different types of orders can be used to enter into a trade: for sell stop order, wait until a candlestick touches the level and place your order 2-5 pips below the low of that candlestick. Sell limit orders can be placed 2-5 pips below the support turned resistance line. Or you can sell immediately at market once price hits that level. Place your stop loss 10-30 pips above the support turned resistance line if you use sell limit and market orders. For sell stop orders, place 2-5 pips above the high of the candlestick that touches that line. For take profit targets, look for previous significant swing lows and place your profit targets within that.
Hidden divergence vs regular divergence – what’s the difference? Either type of divergence can provide a powerful edge with the right trading strategy. In this article, I’m going to show you the difference between hidden divergence and regular divergence. I’m also going to show you how these two types of divergence should be used, and I’ll give you some tips on trading hidden divergence. Keep reading to learn how to increase your odds of taking winning trend continuation trades. Hidden Divergence vs Regular Divergence Hidden divergence is a sign of trend continuation, while regular divergence is a sign of trend reversal. The idea is that regular divergence shows momentum leaving the trend, which could be an early sign of a reversal. Hidden divergence shows momentum coming into the current trend, which makes a continuation more likely. The charts below show examples of both hidden divergence and regular divergence. I’ve marked the bullish divergence in green and the bearish divergence in red. In the chart above, you can see some examples of regular MACD divergence. Regular divergence is measured off of the lows of price and the indicator during a downtrend, and off of the highs of price and the indicator during an uptrend. Starting from the left, price made lower lows while the MACD line made a double bottom. Next, price made a double top while the histogram made lower highs. Finally, price made three consecutive higher highs while the histogram made three consecutive lower highs. In the chart above, you can see some examples of hidden MACD divergence. Hidden divergence is measured off of the lows of price and the indicator during an uptrend, and off of the highs of price and the indicator during a downtrend (the opposite of regular divergence). Starting from the left, price made higher lows while the histogram made lower lows. Next, price made higher lows while the histogram made a double bottom. These are both examples of bullish hidden divergence. Tips for Trading Hidden Divergence One technique that can greatly increase your success rate with divergence trading is combining your various divergence patterns with other entry triggers. For the sake of this article, we’ll be using candlestick patterns in combination with hidden divergence. In the previous chart (above), you’ll notice that I’ve highlighted two candlestick patterns. The first was a bullish engulfing candlestick pattern, and the second was a morning star candlestick pattern. Both of those signals could have helped you time your entry off of those two hidden divergence patterns. In the chart above, you can see an example of bearish hidden stochastic divergence. Price made a lower high while the stochastic oscillator made a higher high. Remember that, for hidden divergence, we measure off of the highs of price and the indicator in a downtrend. Notice: I drew the hidden divergence off of the highs in price and where those highs corresponded on the stochastic oscillator. I only considered a new high to be forming after the stochastic had crossed below the 50 line (not visible on this chart) and then crossed back above it. After this hidden divergence pattern occurred, a bearish engulfing candlestick pattern also occurred. This strong bearish signal could have helped you get the best entry with this setup. Do you see how the candlestick pattern strengthens the case for the hidden divergence pattern and vice versa? In the chart above, you can see an example of bearish hidden RSI divergence. Price made a lower high while the RSI made a higher high. A bearish engulfing pattern formed at the second high, confirming our hidden divergence pattern. Note: This was not a very good bearish engulfing pattern to take, because the engulfing candle did not close in the lower 1/3rd of its rage, which is slightly bullish. To learn more about how to trade candlestick signals, check out my free price action trading course. The candlestick signal that I highlighted above was not the first candlestick signal to occur at the lower high. However, if you had correctly placed your stop loss above the highest point in the cycle, this trade would have worked out anyway. Hidden Divergence vs Regular Divergence – What You Should Know The difference between hidden divergence and regular divergence is that hidden divergence is drawn off of the highs of price and the indicator in a downtrend. Similarly, it’s drawn off of the lows of price and the indicator in an uptrend. This is the opposite of regular divergence. Hidden divergence also signals a possible trend continuation. Regular divergence signals a possible trend reversal. Both can be powerful entry signals when combined with other profitable trading strategies. Hidden divergence vs regular divergence – which do you prefer to use with your trading system? Let me know in the comments below. In my own experience, I’ve found regular divergence to be more useful, but I use both hidden and regular divergence on a regular basis.
The 1 2 3 reversal is a price action trading pattern that can easily form the basis of a trading strategy. It is a simple price pattern that is simple to spot on your charts and many swing traders will find it easier compared to other more advanced swing trading strategies and systems. As with any trading strategy I talk about on my blog, location is important and the 1 2 3 reversal is no exception. You can use this price pattern in a few ways including: Finding a trading position in the direction of the trend Being a counter trend trader and looking for quick hit reversal trades Being able to position inside of a full trend reversal from downtrend to uptrend and the opposite as well Regardless of how you use it, you must fully understand the risks in trading as well as keep your risk parameters conservative so you can withstand any losing streak. 1 2 3 Reversal You can see there is nothing complicated about this price pattern and the 1 2 3 reversal is simply a breakout of highs or lows after an impulse/corrective move in price. Breakouts fail so the most important aspect of the 1 2 3 reversal pattern is what price does on and directly after the breakout. You want to see price acceptance of the new high. Of course there will often be a pullback after the breakout (Ross Hook), but that does not make this price pattern invalid. In fact, the pullback after the breakout can be a way to add to your position. 1 2 3 Reversals – Daily Chart This is a high level overview and while you may find this enough to trade, others will look for other variables to line up. What’s important to notice is that the #3 point also becomes the #1 point as the first pattern resolves. A break of the green dotted line can be your trading entry. You can see at the last pattern very clearly – a price pullback does not make this trade invalid. Rule Base The 1 2 3 Reversal Setup It is easy to see anything you want on a chart. Our eyes love to see patterns where they don’t really exist. One technique you may want to use to determine if the potential 1 2 3 setups you are looking at is a possible trade, is to use a Fibonacci retracement zone. There is NO magic in Fibs so don’t believe that this is the most important aspect of this reversal pattern. What it can do is make sure that you are seeing a true pattern that has a real retracement as opposed to a simple consolidation pattern. 1 2 3 Reversal – Fibonacci I set my Fib ratios to .382 and .786. As long as price finds its way between these two ratios, I could potentially consider this a trade setup. Another thing that needing a measured zone for price to pull back in to is it can help prevent you from entering a potentially over extended market. Over extension will often lead to mean reversion and entering a trade just prior to mean reversion can make for a painful trade. Entering The 1 2 3 Reversal Setup One of the easiest ways is to just trade the breakout of the pattern. I have not done any back testing on it but I don’t see how that would be an edge especially if you believe that most breakouts will fail. Maybe they won’t just fail, but we’ve seen quick pops above/below #2 that could trigger you into the trade which all traders have probably experienced. Another way to enter is to monitor price as it approaches swing #2. See if you can find some type of consolidation on your trading time frame or even a lower time frame. This will position you before the breakout and if the breakout succeeds with momentum, you will find yourself in quick profits. Other traders may want to enter near location #3 as it will give you a larger profit profile and you can be in profit before the breakout which means any failure of the breakout, won’t cost you as much. Stop Loss Location You can use somewhere below or above the #3 or use an ATR stop that measures the volatility of the market. Just ensure you are not placing your stop loss too close to market action. The main drawback of the 1 2 3 pattern is that stops can be fairly large depending on the length of the 2-3 leg. Traders may, once they recognize the pattern on a higher time frame, drop to a lower time frame and look for the same pattern on a smaller scale. You will get an earlier entry and a smaller risk profile as well. You should consider using the same stop location as you would on the higher time frame chart. With an earlier entry off the lower time frame 1 2 3 reversal, you will have an opportunity for a slightly larger position size. Take Profit Targets You can use the same pattern to exit the trade as well. Consider a market in an uptrend and you’ve entered early on in the move. 1 2 3 Trade Exit Once price takes out #1, you exit the trade regardless of the profits you have accumulated. Traders may notice this is a violation of higher highs and higher lows you need for an uptrend. That is correct. You exit when you see price is no longer respecting the stair stepping trend direction pattern. Another profit taking approach is to use Fibonacci extensions. 1 2 3 Profit Targets – Fibs Managing Your Trade There are many different ways to manage a trade from multiples of risk to price action patterns. I like to keep things simple in regards to managing my trades with any trading strategy. Being a risk manager is my first job. Once I am in profit at 1R, I will bank a percentage of my profits. The actual percentage will depend on the strength of price but anywhere from 25-35%. Depending on the size of the trade, I may or may not move my stop to break-even. It depends on how far price has traveled. I don’t want a protective stop too close that it is hit by fluctuations in the market that don’t challenge the trade. You can take further action at 2R and 3R or use Fib targets to scale out or exit fully at the 2.0 which is the length of 2-3 of the 1 2 3 reversal pattern Hope this helps and please share this trading post!