Day Wave Trading Using Fibonacci Retracements

Day Wave Trading Using Fibonacci Retracements

Submitted by adil on Wed, 07/02/2014 - 17:30

Learn to Read the Waves!

Day wave trading is a short term trading technique that is produced by using Fibonacci Retracement. Being a trader, you will be aware of what Fibonacci Retracement is. It is a process by which potential points of resistance and support are predicted and extrapolated on a chart of prices of a financial asset. The retracements are defined on the basis of the golden ratio and are produced by drawing a trend line between two maximum points and then separating the perpendicular distance with the help of key Fibonacci ratios of 23.6%, 38.2% etc. These ratios correlate with the mathematical link that exists throughout nature. For example, the ratio of the length of a human arm to his height can be defined in the same way as the spiral formation of sunflower seeds found in the head.

Fibonacci Retracements (or FR) came to limelight decades ago and is considered as a very beneficial trading tool if a trader knows how to use it correctly. So what does it mean by using it correctly? Using the FR tool correctly means using it as a projection of points where signals are expected to form. Some traders misunderstand the concept of Fibonacci Retracements and treat them as signals.

It is considered as an effective method in a market where sideways or range bound trends occur because the financial asset is expected to progress through the levels repeatedly. Although, this method proves to be very effective in trending market, yet, a trader should be careful when he trades against the underlying trends. Based on the type of asset, the stochastic oscillator and the MACD histogram, charts of thirty minutes or one hour candlesticks can also be used. A trader shouldn’t take the retracements or levels as signals because when the price hits that level, it doesn’t represent the buy or sell. That certain level is a point where favorable signals are likely to occur. This technique is specifically useful in forex binary option trading since it is effective in a market with range bound trends or where the price of financial asset does not have large movements.

Let’s take an example of USD/CHF as it is changing positions in between .87 and .90 for almost 4 months. This currency pair just reached the resistance level at the higher end of the range and now stands a very good chance to move back downwards creating a period stops along side Fibonacci Retracement levels. As you can see in the chart below, a series of up and down movements are created by the asset between two maximum points of the range. These movements have day waves, meaning they represent peaks and troughs. In a period of May and June, the USD/CHF pair reached the top of the range, which can be seen at the right side of the chart confirming resistance at the highest end of the range. It shows that the financial asset will retrace a part of range if not the entire range. This is considered as a favorable time to use Fibonacci Retracement to predict the points where signals can be found.

The second chart, as shown in the image below, is a chart of the thirty minute candlestick. As you can see, the currency pair opens slightly above the level of 38.2 percent, which can be taken as a favorable point to find the signals. The opening point itself can be taken as good signals because in the previous session, the currency pair found support at FR level. Any given second will be good to enter into a trade when the USD/CHF pair reaches this level, provided it does not indicate any sign of breaking through. If you look at the chart, you will observe that after the opening point, two bullish signals are formed by the asset, which shows that the currency pair is expected to move backward to resistance (at a level of 23.6 percent.)

A trader should know that signals are difficult to find initially, but he can trade confidently once the support and resistance points are identified on one of the Fibonacci Retracement levels.