There are tens of Fibonacci indicator utility methods to trade at the stock market with. This post is not up and down the Fibonacci, but about the genuine, core, original method Fibonacci levels are drawn after.
Number of traders does not know how to correctly use Fibonacci tool as they can’t make difference between Fibonacci retracement and Fibonacci extensions levels. Not nice to hear as this method is found in the very foundations of technical analysis itself.
How To Draw Fibonacci Retracement
To make it crystal clear, I will take example of current status at EUR/USD currency pair (chart screenshot below). Now, regardless of which version of Fibonacci indicator you use (standard/default found at your platform or custom Fibonacci indicator) the way you draw is identically the same in both cases. All you’ve got to do is to follow the rules in order to obtain the correct info on Fibonacci levels.
The best thing to start with would be to determine the course of trend. As you can see, my example sports the bullish trend. Fibonacci retracements are always drawn from the point where trend started to the point where it ended. In my case, start point is marked with number 1, end point with number 2. After the tool selection of the platform, points number 1 and 2 are joined with a line. This will generate the line, as shown on the chart below, which is used to determine places for position opening.
How To Draw Fibonacci Extensions
Fibonacci extensions are used to determine stop loss levels. It is drawn in exactly the same way, but in the opposite direction. I have drawn a line from point 2 to point 1, generating Fibonacci extension.
My example had bullish trend. In case of bearish trend, everything is done the other way around.
Bearish Trend Example
I have ascertained there is a bearish trend on my chart (see chart screenshot above). The trend start-point is in number one, trend end-point is number 2. I draw Fibonacci tool from point 1 to point 2, generating Fibonacci retracement.
Fibonacci extensions are drawn the other way around. I draw Fibonacci tool from point 2 to point 1, generating Fibonacci extensions (see chart below).
As you can see, Fibonacci retracements and extensions can easily become pain-in-the-butt if you are not sure which is drawn how and in-what-way. Once they are mixed up, it takes time to learn the difference and get back on the right tracks, thus it is utterly important to learn them correctly from the very start.
Once you are over it, you’re on a half way to become Fibonacci trader. The other rules of Fibonacci trading method are somewhat more complicated and I will write about them another time.