How to Trade Fibonacci Retracements

Summary

This tutorial introduces trading retracements, a technical analysis method for short-term trades. It explains retracements as temporary price corrections within a larger trend, highlighting their potential for profitable trades. The video teaches how to identify retracements using Fibonacci levels, with key levels at 38.2%, 50%, and 61.8%. It advises using these levels for entry points and Fibonacci extensions for setting take-profit targets, while emphasizing the importance of practicing with a demo account and using stop losses to manage risk.

Takeaways

• 📈 **Retracements Defined**: Retracements are short-term price corrections during an overall larger upward or downward movement.
• 💡 **Trading Retracements**: They provide opportunities to enter trades in the original trend direction at better prices.
• 🔍 **Fibonacci Retracement Levels**: Key levels at 38.2%, 50%, and 61.8% are used to identify potential retracement points.
• 📊 **Market Behavior**: Retracements occur as traders take profits, causing a temporary reversal before the trend resumes.
• 📉 **Entry Strategy**: Enter trades after a pullback in an uptrend or a rally in a downtrend, using Fibonacci levels for entry points.
• 🔄 **Trend Continuation**: After a retracement, the original trend's forces often resume, continuing the price movement.
• 🚫 **Risk Management**: Use stop losses placed above or below the retracement level to manage risk.
• 🎯 **Profit Targets**: Use Fibonacci extension levels as potential take-profit levels.
• 📚 **Technical Analysis**: Fibonacci retracements are a method of technical analysis used for short-term trades.
• ⏱️ **Time and Practice**: Mastering retracement trading takes time and practice; use a demo account for testing.

Q & A

What is the main focus of the Trading 22's tutorial series?

The main focus of the Trading 22's tutorial series is on trading strategies, specifically in this second tutorial, it covers how to trade retracements.

What is suggested for mastering trading strategies?

It is suggested to take advantage of the free practice account in the Trading 212 Pro platform to test strategies with live prices.

What are retracements in trading?

Retracements are short-term price corrections during an overall larger upward or downward movement. They are temporary price reversals and do not indicate a change in the direction of the larger trend.

What is the benefit of trading retracements?

The main benefit of trading retracements is that they provide an opportunity to profit by entering a trade in the original direction of the trend at a better price, just before the continuation of the move.

Why do retracements occur in the market?

Retracements occur when traders close their positions to take profit after a significant upward movement, causing a temporary sell-off and pullback in the market.

How do you enter a trade in a retracement?

To enter a trade in a retracement, you should look to enter the market in the direction of the trend right after a pullback has occurred, buying pullbacks in an uptrend and selling rallies in a downtrend.

What are Fibonacci retracement levels?

Fibonacci retracement levels are horizontal lines that occur when using the Fibonacci retracement tool on a chart, which are automatically calculated by the trading platform and help identify potential support and resistance levels.

What are the most popular Fibonacci retracement levels?

The most popular Fibonacci retracement levels are 38.2%, 50%, and 61.8%.

How can Fibonacci retracement levels be used as take profit levels?

Fibonacci retracement levels can be used as take profit levels by identifying potential resistance levels where the price may reverse, allowing traders to exit their trades at a profit.

What is the significance of the 50% Fibonacci retracement level?

The 50% Fibonacci retracement level is significant because it is around this level that most major moves are expected to retrace, and it can also signal a potential trend reversal if the price moves beyond this level.

How should you place your stop loss when trading retracements?

When trading retracements, your stop loss should be placed just below the retracement level in an upward trend and just above the retracement level in a downward trend.

What are Fibonacci extension levels and how can they be used?

Fibonacci extension levels are used as potential take-profit levels for trades in the direction of the trend. They are calculated based on the Fibonacci number sequence and provide reasonable profit targets similar to retracement levels.

Outlines

00:00

📈 Introduction to Trading Retracements

This section introduces the concept of retracements as short-term price corrections within a larger trend. It emphasizes the importance of practice and the use of a demo account for strategy mastery. The tutorial explains the benefits of trading retracements, which include profiting from entering trades in the original trend direction at better prices. It also discusses why retracements occur, using an example of an upward trend where traders take profits, causing temporary sell-offs. The section concludes with advice on how to enter a retracement trade by identifying strong upward or downward movements and waiting for a pullback to enter in the direction of the trend. It introduces Fibonacci retracement levels as a tool for identifying entry points.

05:01

🚀 Utilizing Fibonacci Retracement and Extension Levels

This section delves into the practical application of Fibonacci retracement levels for entering trades and Fibonacci extension levels for setting profit targets. It advises placing stop losses below retracement levels in a downtrend and above in an uptrend. The tutorial demonstrates using the Fibonacci tool on a chart, showing how to plot retracement levels from a swing high to a swing low. It highlights the popular Fibonacci levels at 38.2%, 50%, and 61.8%, and introduces extension levels at 100%, 138.2%, 161.8%, and 261.8% as potential take-profit levels. The summary stresses the importance of using stop losses and waiting for confirmation signals before entering trades. It concludes with a reminder to be cautious of potential trend reversals and the importance of distinguishing between retracements and reversals.

Keywords

💡Retracement

A retracement is a short-term price correction during an overall larger upward or downward movement. It represents a temporary reversal in price that does not indicate a change in the direction of the larger trend. In the video, retracements are discussed as opportunities for short-term trades, allowing traders to enter trades in the original direction of the trend at better prices just before the continuation of the move.

💡Fibonacci Retracement Levels

Fibonacci retracement levels are percentages at which the market might reverse or pause, based on the Fibonacci sequence. These levels are used by traders to predict potential support and resistance levels during a retracement. In the script, the most popular Fibonacci retracement levels mentioned are 38.2%, 50%, and 61.8%, which are used to identify entry points into the market.

💡Swing High and Swing Low

Swing high and swing low are terms used to identify the highest and lowest points of a price movement over a given time period, respectively. These points are crucial for applying Fibonacci retracement levels to a chart, as they help determine the start and end points for drawing the retracement lines. The script uses these concepts to demonstrate how to apply the Fibonacci retracement tool.

💡Technical Analysis

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. In the video, finding and trading retracements is presented as a method of technical analysis used for short-term trades, focusing on identifying patterns and trends to predict future price movements.

💡Trend

A trend is a direction in which the price of a security is moving, either upward (bullish) or downward (bearish). The script emphasizes the importance of identifying a strong trend to find good entry positions for retracement trades, as retracements occur within the context of larger trends.

💡Pullback

A pullback refers to a temporary decline in an otherwise rising market or an increase in a falling market. In the context of the video, pullbacks are seen as opportunities to enter trades in the direction of the trend, as they represent a temporary reversal that is expected to reverse back to the original trend direction.

💡Fibonacci Extension Levels

Fibonacci extension levels are used to project potential price levels where a trend might reverse or pause. These levels are calculated based on the Fibonacci sequence and are used as potential take-profit levels. The script mentions using these levels as reasonable profit targets after using Fibonacci retracement levels to forecast entries into the market.

💡Stop Loss

A stop loss is an order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a position. In the video, placing a stop loss is discussed as part of the exit strategy in trading retracements, with recommendations to place the stop loss just below the retracement level in an upward trend or just above in a downward trend.

💡Take Profit

Take profit is an order placed with a broker to sell a security when it reaches a certain price. It is designed to lock in profits on a position. The script explains how Fibonacci extension levels can be used as reasonable profit targets, helping traders to determine where to take profits after entering a retracement trade.

💡Candlestick

A candlestick is a style of financial chart used to describe price movements of a security, derivative, or currency. Each 'candle' represents a specific time period and displays the open, high, low, and closing prices for that period. The script mentions waiting for a candlestick to close in the desired direction as a confirmation signal before entering a trade.

💡Self-fulfilling Prophecy

A self-fulfilling prophecy is a prediction that causes people to act in such a way that the prediction comes true. In the context of the video, the concept is applied to the accuracy of Fibonacci levels, as many traders watch these levels and place orders based on them, which can lead to the price actually reaching those levels.

Highlights

Retracements are short-term price corrections during an overall larger upward or downward movement.

Trading retracements provide an opportunity to profit by entering a trade in the original direction of the trend at a better price.

Fibonacci retracement levels are used to identify potential support and resistance levels.

The most popular Fibonacci retracement levels are 38.2%, 50%, and 61.8%.

Fibonacci extension levels can be used as take profit levels.

Retracements occur when traders take profit, causing a temporary sell-off.

To enter a retracement trade, look for a strong upward or downward movement and enter after a pullback.

Use the Fibonacci retracement tool to draw a line between the swing high and swing low points of a trend.

In an uptrend, buy pullbacks; in a downtrend, sell rallies.

Wait for confirmation that the price will move back into the original trend before entering a trade.

Use additional technical indicators for confirmation to avoid relying solely on Fibonacci retracements.

For an uptrend, place your stop loss just below the retracement level.

For a downtrend, place your stop loss just above the retracement level.

Fibonacci retracement levels can forecast entries into the market, while extensions can be used for profit targets.

Key Fibonacci extension levels are 38.2%, 50%, 61.8%, 100%, 138.2%, and 161.8%.

Use stop losses to minimize risk when trading retracements.

Ensure that the retracement is a temporary reversal and not a new move in the opposite direction.

Transcripts

welcome to trading 22's tutorial series

on trading strategies in this second

tutorial we will go over how to trade

retracements once again keep in mind

that each strategy will take time and

practice to master we suggest you take

advantage of the free practice account

in the trading 212 Pro platform to test

strategy with live

prices in this tutorial you will learn

what retracements are what benefits

trading retracements provide what

Fibonacci retrace M levels are and

finally what Fibonacci extension levels

are and how you can use them as take

profit levels what is a retracement

retracements are short-term price

Corrections during an overall larger

upward or downward movement these price

Corrections are temporary price

reversals and do not indicate a change

in the direction of the larger Trend

finding and trading retracements is a

method of technical analysis used for

short-term trades the main benefit of

trading retracements is that they

provide an opportunity to profit by

entering a trade in the original

direction of the trend at a better price

just before the continuation of the move

why do retracements occur I will

illustrate with an example assuming we

are talking about a large upward Trend a

significant number of Traders start to

buy as they believe the market price

will increase this pushes the market

higher and as more Traders notice the

movement they start buying as well when

the movement has gained traction some

Traders will close their position to

take take profit and this may result in

a temporary sell-off and the market will

pull back and the upward momentum will

be suspended after this the original

forces that formed the trend resume

their activity and the price continues

to rise until the trend has run its

course and reverses so how would you

enter your trade in a retracement what's

first the first thing you need to do is

find a strong upward or downward

movement of a given Financial instrument

to find a good entry position you should

look to enter the market in the

direction of the trend right after a

pullback has occurred put simply you

should buy pullbacks in an uptrend and

sell rallies in a down Trend however how

do we know when the market will pull

back this is where Fibonacci

retracements come in in order to apply

Fibonacci retracement levels to your

chart you need to identify the swing

High and the swing low points of a trend

a swing high is identified as the

highest point displayed on a given time

period a swing low is created when a low

is lower than any other point over a

given time period using the Fibonacci

retracement tool in the trading platform

you draw a line between the swing low

and the swing High the horizontal lines

that occur are the Fibonacci retracement

levels which are automatically

calculated by the trading platform the

most popular Fibonacci retracement

levels are the

38.2% 50% and

61.8% in the trading 212 Pro platform

you have a Fibonacci retracement tool it

places support and resistance levels on

on your chart based on the Fibonacci

numbers there are many theories

mathematical equations and strategies

out there that try to make sense of a

market that is largely speculative

however it is widely accepted among

traders that rely on technical analysis

that most major moves will retrace

around the fibon levels and more

specifically around the 50% level of the

move so in an uptrend a price will

retrace down a certain percentage of the

move before continuing its long upward

movement likewise in a downward trend

the price will move up a certain

percentage before continuing its

long-term downward movement if the price

moves beyond the 50% level it might be a

signal a trend reversal is about to

happen and it may be an opportune moment

for switching the direction of your next

trade in this tutorial we will simply

refer to the Fibonacci retracement tool

and how to use it we will be explaining

the mathematics and more on Fibonacci in

following video tutorials so Traders use

these Fibonacci levels as efficient

entries in the direction of the trend

because many Traders watch these same

levels and place buy sell or stop orders

based on them they are quite accurate

and become self-fulfilling prophecy so

how should you enter in an uptrend you

can use the Fibonacci retracement levels

for an entry into the market for an

entry in an uptrend you should look to

see whether the price finds support at

these levels then we suggest you wait

for confirmation that the price will

move back into the original upward

movement and then enter as with any

technical indicator it is better to seek

additional indications to support your

initial analysis so that you don't base

your trade solely on Fibonacci

retracements look for Clear signals to

buy or sell for instance wait for a

Candlestick to close in the desired

direction to give you more confirmation

on whether you should place an order if

it does form you can place a market

order at this point as you have solid

reasons to believe that this level could

hold how to enter in a downtrend

likewise for a downward Trend you can

place your entry after the price has

found resistance at one of the Fibonacci

levels after you wait for confirmation

that the price will move back into the

original downward Trend you can place

your entry

order so how to place your exit now that

you have decided on your entry you need

to determine your exit strategy your

exit strategy is comprised of two steps

first one is deciding where to place

your stop loss and the second is where

to place your target profit let's look

at the same graph that we had for our

upward Trend here we suggest you place

your stop loss just below the

retracement level in a downward Trend we

suggest you place your stop loss just

above the retracement level where should

you take profit and now for the best

part your target profit if we use

Fibonacci retracement levels to forecast

entries into the market we can use

Fibonacci extensions as reasonable

profit targets Fibonacci extensions make

good potential take-profit levels for

trades in the direction of the trend

similar to the retracement levels the

key Fibonacci extension levels are 38.2%

50%

61.8% as well as 100 138.236.128.7

[Music]

to demonstrate how to use the Fibonacci

retracement tool here we have opened the

chart for the German index Dax in a

Candlestick mode at a 1our time interval

the Price's movement is easily

recognizable in the trading 212 platform

on the side you have a Fibonacci icon

when you click it you choose

retracements then you click right where

the trend begins and drag until you

reach the end of the movement where the

move started you'll see a 100 displayed

on the side and where it ends a zero

when you have plotted this line the

Fibonacci tool automatically places the

retracement levels based on the

Fibonacci number sequence in our case

here you see a retracement at 38.2% and

we would enter at this

level we would then place our stop below

the entry level you could place it

either below the 50% or the 61.8% level

we will take the first Fibonacci

extension level at 6 1.8% as a

reasonable Target

profit to summarize a retracement is a

short-term price correction during a

overall long-term upward or downward

Trend the benefit to trading

retracements is that they provide an

opportunity to profit by entering a

trade in the original direction of the

trend at a better price the basis of the

trading strategy is to buy pullbacks in

an uptrend and sell rallies in a

downtrend a good way of identifying them

is to use Fibonacci retracements to set

your take profit you can use the

Fibonacci extensions as reasonable

profit targets as always we recommend

you use stop losses they can be placed

above or below the last retracement

level what to watch out for each

strategy has its risks when trading

retracements make sure that it is a

temporary reversal and not a new move in

the opposite direction this would

essentially be a reversal not a

retracement and would incur a loss for

the Trader who's placing orders with the

original move we will discuss reversals

in our next tutorial on trading

strategies thank you for watching this

tutorial on trading retracements we wish

you successful trading with trading 212