From the June 01, 2012 issue of Futures Magazine • Subscribe!

It’s not witchcraft, it’s Fibonacci

For a 38.2% retracement level, the guidelines are:

  • If price holds at the 38.2% retracement level, the prior move is considered to be strong. As a result, the counter move should be strong.
  • A 38.2% retracement after a strong advance typically is followed by a move to a new high.
  • A 38.2% retracement after a strong decline typically is followed by a move to a new low.

For a 61.8% retracement level, the guidelines are:

  • If a stock experiences a 61.8% retracement, the prior move is considered weak (or near its end). As a result, the counter move should be weak.
  • A 61.8% retracement after a strong advance often leads to a move with a one-in-three chance of exceeding the prior high. The same also applies in reverse.
  • The first retracement after a strong up move is considered a buy most of the time, but you need to consider exiting a trade as price nears its previous high or low.

These guidelines act as a safeguard to keep your own emotions under control to prevent any euphoric anticipation of a runaway move or sense of overwhelming fear of a losing trade (see “S&P reversal,” below). Keeping your personal expectations in check will preserve your objectivity and prevent you from projecting those feelings into your trading.

<< Page 3 of 4 >>
Comments
comments powered by Disqus