A concept we always use in trading is the importance of using support and resistance levels for entry and exit of positions. Like getting a good entry, important for successful trade is exiting your trades at levels that maximize your gains. In this article, we will show you how to use Fibonacci retracements for finding a good entry and stop loss levels.
Fibonacci retracements are a tool that is often used in the financial markets technical analysis for finding good entry points for trades. These levels are usually found by pinpointing the swing high and low in the direction of the prevailing trend. Retracements show the percentage price rebound (retraces) from the extreme points on the chart.
Fibonacci retracements of 23.6%, 38.2%, 50%, 61.8%, 75% and 88.6% are often used in the financial markets. These points are horizontal lines visible on the chart. Traditionally traders begin to look for the instrument to react from these levels back into the direction of the initial trend. Retracement levels can be used by trend traders or breakout traders as well.
Looking at the Gold daily chart, we can see that the instrument is in a downtrend channel (we are using Pitchfork channels) and also below important 200 SMA 1273 level.
Now make sure that you choose Fibonacci retracement tool from your platform (usually it is built in tool) and apply it to the chart pinpointed from the July ’16 high as 100% and Dec. ’16 low as 0.
How can you interpret Fibonacci retracement on Gold?
You can see now, that with the prevailing downtrend, you can only choose short trade entry, because as long as the instrument is below 200 SMA 1273 level and falling channel line 1300 level, long trade entries will be counter-trend trades. The short trade could be initiated here or on any near term bounce to 50% Fibbo retracement 1258 level with stop loss 10$ above this level.
That will be the first try to catch the downside reversal in the Gold. The second will be, if this one fails, between 200 SMA 1273 level and 61.8% Fibbo retracement 1290 level. The clear daily close above 1290 level would invalidate the downtrend and could lead to a higher retracement level 75% 88.6%.
You can use this tool for any instrument on the market and it will become easy for you to choose good entry points.
Happy trading! (click on the chart to enlarge it)
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