In the market in up or down trend always follow trend and retracement or correction together. It never directly goes up or down before it reaches its final target. This is basic concept of price action trading.
We will be applying the Fibonacci on these consolidation levels.
- During the uptrend we use Fibonacci tool to find the support level. This tool helps in identifying all the important support levels.
Note: This tool is available free of cost with any broker you are using.
The number you can see here are mathematical values used by big traders to find out important support and resistance levels. We have here displayed the most powerful levels which can help you take the right decisions. There are more mathematical numbers like these, but we have only used the most important one here. They are
- 0.382 level – golden level
- 0.5 level
- 0.618 level
In uptrend when ever market is taking support at any of these levels, consider them as the strongest support level and plan your trading strategy accordingly.
Let us now show you how to use the Fibonacci tool. From the current swings draw the Fibonacci from the swing low level to the swing high level.
The above shows the Fibonacci level drawn marking the latest swing low and highs for nifty. Here the tool is helping you identify the upcoming support levels for the current swing. This becomes very important when you are in live market and want to take correct decision for your exit.
Example of nifty in intraday: Strategy to properly plan the exit
Market has taken support at 0.5 level in the uptrend. At this stage if you are not a risky trader you can choose to take exit since market has crossed both 0.5 and 0.6 levels. Ideal recommendation is to exit when ever market cuts the strongest 0.3 level. Lets see what has happened after this.
Market continues with the current trend. Our decision of waiting was correct here. Now check again with the new swing high. Market took support at 0.38 level and continued with its trend. This type of strategy is quite helpful when you are in the market and cannot decide on your risk to reward ratio. You would have noticed in the both the images at the time of retracement market has taken support exactly as per the fibonacci indicated levels.
Key Note: Always remember 0.382 level is a very strong support level. If the market is taking support at this level and going up then the trend will be very strong. This is the golden level of fibonacci levels.
Additional recommendations on planning the exit:
- Logic A: Plan exit using trend line: This is helpful strategy if you are a price action trader. In this you to draw a trend line with maximum level of touches. When ever you see that trend line level is broken and market goes down, its time for you to act and exit your trade.
- Logic B: use moving average indicator to plan your exit. In this all you need to do is to change the length setting of this indicator to 50, mostly the default is 9, just replace that number with 50 and save. As you can see in the image below, the moment your trend line cuts moving average you can decide to exit. Here the trend line went high and then started making correction. In the process it went quite low close to the 50 MA. At this stage, its always better to plan exit than taking further risk.
Fibonacci down trend analysis:
In this image you will notice stocks have moved to the down side after making a swing high. It also crossed the 0.5 level. Just looking at this we may make mistake by taking our selling position assuming down trend has begun. Therefore its always better to mark trend line. You can see in the image there is blue line indicator. This is quite helpful to understand the candle behaviors.
Key Note: When market is retracing or when there is a pull back or consolidation if the stock breaks all the important fibonacci levels that means there is going to be a trend reversal. 80 to 90 percent of the time the trend will reverse. When such scenario happen in uptrend you should no longer look for buying opportunity but selling one and vice versa.
During down trend you need to 1st identify the swing high take fibonacci from this point and wait until you get exact swing low. In the image above you can see the same. Stocks has broken 0.3 & 0.5 levels but the 0.6 level has not broken. So this movement is confirm us that market is moving towards the down side. At this point you will usually see very high volume.
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