FIBONACCI – A VERY VERY FASCINATING SUBJECT
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PART 1 – INTERNAL RETRACEMENTS
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Years of research, sacred literature, white papers, mathematics – all of them indicate that our brains are hard-wired to fibonacci ratios & its square root. This mob-mentality/crowd psychology is what creates all trends and corrections in the global market.
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Most algorithms are based on Elliott wave and Fibonacci patterns and when more than 70% of the trading happens through algorithms/algos in today’s era, smaller retail traders need to be able to gauge scenarios/structures within these algos to emulate the trades of the big guys. That’s the only method for smaller guys to make money in the market. The Elliott wave structures and fibonacci ratios provide clear entry and exit strategies.
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Institutional algos transition from one scenario to another as a result of fundamentals. Smaller retail traders have to be on their toes doing the same with them through super-quick emotionless entry and exit strategies. That’s why tight SLs, 1% rule, trading near supports/resistances are the BEDROCK of technical trading.
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Technical traders move from one scenario to the other with zero emotions/biases. All trades are good risk/reward, very low risk with tight SL, 1% rule & good entry points. Gains are typically in the range of 4-9% while losses 0.3 - 0.8%.
Do the math with a good sample of 100 trades over 6 month/one year period and even a reasonable conversion/hit rate shall result in very healthy performance
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Without dwelling into the history of fibonacci which is a very interesting subject and has plenty of literature, let us share some key basic pointers that shall help you build your trading acumen to the next level.
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Fibonacci has two types of retracements – internal and external
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Internal is 38.2%, 50%, 61.8% and 78.6%
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50% and 78.6% are technically not fib ratios.
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78.6% has a square root relationship with 61.8%.
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Since they are all closely related, these 4 fibonacci points are most important in trading.
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How to apply them in trading?
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50% and 61.8% is where most corrections end and can be good supports/resistances
38.2% is a temporary weaker support/resistance
78.6% is the final gate beyond which the scenario/trend may change
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ONLY applying internal retracements SHALL NOT WORK.
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ONE NEEDS A COMBINATION OF INTERNAL RETRACEMENTS, EXTERNAL RETRACEMENTS AND MOST IMPORTANTLY, ELLIOTT WAVE STRUCTURES TO DEVELOP LOW RISK, HIGH PROBABILITY SCENARIOS
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We will cover external retracements in PART -2 and how to link them to Elliott wave structures in Part-3 shortly.
The objective shall be to help all of you learn them well by first building on the basics and then applying them on a daily basis by practicing with us on every trade. This shall help you become an independent trader in a few months. You shall be able to apply them to commodities, Forex pairs, Stocks, Cryptos etc.
“Trading is all about scenario analysis & adapting one's biases/emotions to it. Scenarios develop every hour. One needs to learn how to successfully blend into these” – Arnam Capital
"Observation, Experience, Memory & Mathematics - this is all a successful trader relies on" – Jesse Livermore
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[JESSE LIVERMORE is considered to be one of the most successful and famous traders in history.]