Fibonacci Retracements are based on a Trendline

  Fibonacci Retracements are based on a Trendline

1.  Fibonacci Retracements are based on a trendline drawn between a sustained trough and peak.

2.  If a trend is rising, the retracement lines will descend from 100% to 0%

3.  If a trend is declining falling, the retracement lines will move up from 0% to 100%

4.  Horizontal lines can be drawn at the common Fibonacci levels of 38%, 50%, & 62%

5.  As the price retraces, support and resistance occur at or near the Fi­bonacci Retracement levels with a high degree of accuracy.

If the 38%, 50%, and 62% area are known to be retracement levels that many technical investors are watching, then it makes sense to analyze what candle­stick signals might be occurring at any one of those levels. The advantage of being able to read the candlestick formations is very beneficial. It allows an investor to evaluate immediately which one of these levels is going to act as support or resistance. That knowledge allows the candlestick investor to posi­tion themselves ahead of other technical analysts that need confirmation that a specific level has held. For the daytrader, utilizing this knowledge can be highly profitable when trading the index futures. Being able to enter a trade at the exact optimal level provides a very high-profit, low-risk trading platform. Uti­lizing the Fibonacci number levels can be used as a primary trade entry system or it can be added as an additional entry parameter. Where will a pullback stop? If a trend pattern can be recognized, then watching for the candlestick signals at support levels that other investors are watching can prepare the in­vestor for when a reversal should occur.

As seen in Fig. 18, the PLX Technology chart, a strong uptrend was followed by a pullback. To identify where that pullback should stop, applying the obvi­ous technical indicators increases the probabilities of being in a correct trade. The PLX technology chart illustrates the effective use of candlestick signals with the Fibonnacci numbers. After an extended uptrend, a pull back occurs.

Fig. 18, the PLX Technology chart

Where can a pull back be expected to stop? The moving average becomes a possibility. Putting Fibonacci numbers on the chart becomes a logical target.

Witnessing a Doji just barely touching the 38% retracement level becomes the point to start watching for a reversal. A Doji, followed by a Bullish Engulf­ing signal, reveals that buying started right at an important technical level.

Is the 38% Fibonacci retracement level a place to watch for a reversal? Not necessarily! The candlestick reversal signals are the primary decision making factors. Placing the Fibonacci retracement levels on the candlestick chart adds another element for indicating that a reversal has occurred.

Increase Your Probabilities

Utilizing the candlestick signals in conjunction with any other technical indica­tor increases the probabilities of being in a correct trade. The simple and obvi­ous technical indicators are the most productive. When the least experienced investor can identify important levels on a chart, it has to be obvious to every­body. Knowing that a candlestick reversal signal demonstrates immediate in­formation on investor sentiment, a candlestick investor is provided with a very efficient analytical tool. A major candlestick reversal signal, occurring right where everybody is watching for a reversal, allows an investor to take immedi­ate advantage of a trend change. Observe the obvious.