A lot of people have placed the Fibonacci in utmost regard and at times, has been treated by other traders as that of such arcane or mystical aspects. However, Fibonacci in a nutshell is more of just simple retracement of levels and these are not a full proof manner, whether applied in basic math, cryptocurrency or CFD Trading. Let’s look into the different strategies you can apply based on Fibonacci.
What is Fibonacci trading?
In the realm of the stock market, tracing through Fibonacci trading strategy trends. As a stock has trended in a direction, some traders would surmise that there is going to be an upcoming decline or pullback in prices which can also be referenced in your CFD Trading. Traders using this strategy take on this pullback as the retracement levels at 23.6%, 38.2%, 61.8% or 76.4%. This decline is also possible for traders at 50% and that some expert traders observe these Fibonacci numbers more of a short-sell strategy. For example, if your Amazon stock is at $21 and this falls to $20.62, some traders who follow Fibonacci strategies may be able to see a 38 cent drop as more of a good sign to short the stock. However this might sound very reliable for some, this is not 100% accurate.
Does the Fibonacci strategy predict trends in the market?
As most are somewhat skeptics when it comes to the “mystical” aspects of the Fibonacci strategy, it has been used to predict declines from the past. For example, last February 2020, the Dow Jones retraced for about 50% before the crash caused by the COVID-19 pandemic. The pullback in this ratio will mean that there will be an end to the previous bull market. After the retracement stated by Andrew Adams, a technical analyst in Saut Strategy, there was devastation in the financial trading market. Although the trading strategy is not exact, when a trader uses the Fibonacci strategy correctly, it may be able to project big stock market trends.
Strategy 1: Pullback Trades
First and foremost, security in a strong trend is needed to be identified. This is defined as a stock that had successive highs with pullbacks or declines at below 50%. When in day trading, this is identified on a 5-minute chart that is present 20-30 minutes after the market opens.
As you identify the uptrend you have observed in the market, you may look into the stock that behaves at 38.2% and 50% in retracement levels by observing them by sales, time and in level 2. As soon as you look at the trading activity starting to slow down and even turning, you may enter the trade. You may base your exit point of the trade during the Fibonacci extension level or most recent high.
Strategy 2: Breakout Trades
In general, Breakout trades have the highest failure rates in the realm of trading. However, this may not be the case when you increase the chances of things to work out in your favor and it is not clearly enough for you to just purchase the breakout. You may want to ensure that the stock you are eyeing is approaching the break out level does not retrace in excess of 38.2% of the prior swing. As you do so, this will enable you to increase the chances of the stocks to go higher. As a fail safe , you will need to start a mitigation tactic in order for you to control the situation whereas you being exposed to far more risks due to the stock having a deeper retracement due to the fact that you are buying at the highest or selling at the lowest.