This advanced Fibonacci retracement and extension tool tutorial will show how to identify profitable trading opportunities. As part of a larger support and resistance series, explore the links in the video description for additional information. Whether you are new to these concepts or refining your skills, this method adds a unique twist to your trading strategy.
Understanding Fibonacci Retracement
First, let’s revisit Fibonacci retracements, which are drawn from the low of the trading session to the high, or vice versa, depending on market movement. Retracements show the levels where price may pull back before continuing in the direction of the trend. The most common retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
This is most often a 50% retracement in practice, though it is not classically considered a Fibonacci level. Very often, it is that ‘halfway’ from where the price action either pauses or bounces off. This knowledge can prepare you for the potential price reversals.
Combining Fibonacci Extensions and Clusters
The trick involves using Fibonacci extensions alongside retracements. While retracements measure pullbacks within a trend, extensions project potential areas of support and resistance beyond the original high or low. This can help identify key price levels where the market might encounter obstacles.
Using an Impulse Move for Extensions
Instead, you will pick an impulse move from a recent low to a high or vice versa rather than drawing from the previous day’s low and high.
You have to plot three points with the extension tool: starting at the initial low to the high, extend to a new point to set the extension range.
These resulting levels then indicate potential support and resistance zones above or below the current market price.
Drawing Multiple Fibonacci Levels
Draw several Fibonacci retracements and extensions on the basis of different tools for high and lows. In this way, several levels will form a so-called ‘cluster’, reflecting stronger areas of potential reversals.
Clusters of support and resistance levels show the points where the price is likely to stall or reverse. The convergence of these levels adds confidence to your trade.
Understanding Market Cycles and Volatility
One of the keys to successful trading is to be able to identify market cycles, or periods of high and low volatility. When a market makes a parabolic move-a sharp and rapid price increase or decrease-it often then enters into a consolidation phase or low-volatility cycle.
Key Insight
Scanning for high-volatility moves with the expectation of continued momentum is generally counterproductive. Once a move has been recognized by scanners, it’s often nearing its end, and the market may soon enter a phase of low volatility.
Pro Tip: Avoid High Volatility Scanning
The amateur trader often makes the mistake of using scanners to find high-volatility moves, thinking these will continue into substantial trends. These usually mark the end of a high-volatility cycle and the start of a low-volatility phase.
Instead, look for periods of low volatility to signal the potential beginning of a new high-volatility cycle. It is this shift where the most significant moves are likely to occur.
Free Resources and Bonus Material
To support your learning, the following resources are available:
Cycle Indicator
For a free, prerecorded video on using this indicator to identify volatility cycles go to indicatorwebinar.com.
Mini Trading Course
Learn a free trading strategy called the ‘Rubber Band Trade’, easy to learn, and designed to make you trust by offering you value upfront for free.
Conclusion
Applying Fibonacci retracements and extensions, along with knowing that market volatility is essentially cyclic in nature, is the way you can further optimize your trading potential. Practice drawing extensions from impulse moves; be aware of clusters of key support/resistance levels and shifts between high and low volatility phases.
You can get more detailed training and access some exclusive strategies by exploring some free resources and courses to enhance your understanding and skill set.
