Much of the work completed with Fibonacci is discretionary. That is OK for experienced Fibonacci traders because they know how to walk the ropes…
But it is discouraging for new traders as it takes time to learn the patterns and build up experience.
Usually there is no short-cut for gaining solid market knowledge but today we do.
Our focus is geared towards a non-discretionary way of placing the Fibonacci tool on the chart, which reduces the uncertainty factor.
The rules of placing the Fibonacci state the following:
1) Find a swing high and swing low (swing in short) of the chart with a good momentum (most discretionary part). This is preferably done on a 1 smaller time frame than you usually use.
2) Make sure that the bottom or top is not broken. With bullish momentum it’s the bottom of the swing that should not break and with bearish momentum it’s the top of the swing. A break invalidates the swing and means there is no reason to keep the Fib on the chart.
3) ONLY move Fibonacci retracement tool to a new swing AFTER the -61.8% Fib target has been hit. New Fib levels may not be added or drawn until the target gets hit. Place the Fib tool from the bouncing spot to the target OR to the first pausing spot after the target has been reached.
The great thing about this method of placing Fibs on the chart is that it’s very clear when the Fibonacci retracement is moved and when it’s NOT. No Fibs should be redrawn or added when price is still in the middle of the swing.
Most traders have troubles with Fibs as they are insecure about how to place the tool on the graph which leads to many mistakes:
A) Adding multiple Fibs in parts with choppy price action – the danger is that traders overuse Fibs in non-trending markets but the Fib tool works best when the market is trending.
B) Moving the Fibonacci tool too soon before the target has been hit – the danger is that traders anticipate a continuation too soon and the market still provides a deep pullback.
Sticking to this SIMPLE RULE: WAIT FOR THE -61.8% TARGET to get hit before moving the Fib to a different swing is an efficient method. Next week however, we dive into how traders can use more discretionary methods for determining the correct swings and placing the best Fibs.
Before leaving, make sure to read our entire Fibonacci series!