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Fibonacci Retracements – A Precision Trading Strategy
Deciding on a topic for this article, I reviewed the top ranked articles in T2W and found some fantastic material. I did not however find inspiration for a new article idea that readers may like. Perhaps strangely, I then looked at the lowest rated articles. I noticed that two of them discussed Fibonacci which both surprised and intrigued me. It was not necessarily that people did not like Fib, just that perhaps it had not been explained well enough for their liking. I am a huge Fibonacci fan and it plays a big part in my trading so the following will explain how I use it to trade successfully.

While this strategy can be applied to almost any market, I will focus on the Dow Jones e-mini future, with all screenshots been the mini-Dow, (symbol YM) 1 minute charts.

Fibonacci – Is it really so subjective?
No! Not once you know how to use it correctly. There is a precise place where lines should be drawn and many places where they should not be drawn. I have seen them drawn in crazy places by people who claim that Fib does not work. There are also precise retracement levels that you should look to enter at, levels that you should use as a guide only and levels that will help you place stops.

What I am teaching is not from a book and it’s not scientific (not that I know of anyway). It is simply the way that I have come to use Fibonacci retracements after many hours of screen time and it has added significantly to my trading ability after learning how to use it this way. I truly hope that it will assist you with your trading in a positive manner.

This article aims to dispel some of the myths surrounding Fib by showing how it can be used to trade the markets profitably & precisely, not subjectively as so many people seem to think.

You will learn:

1. How fib is used objectively every time we draw a line 
2. Exactly where to draw lines from (Start point)
3. Exactly where to draw lines too (End point)
4. Which of the Fibonacci retracement levels should be used as entry points and which should be used as guide to direction only or a stop loss
5. A trading strategy with precise entry, stop loss and targets

What is a Fibonacci retracement?
After a move up or down in the market, at some point the market will start to ‘pull back’ or ‘retrace’. As the market starts to retrace, traders draw a Fibonacci line in the direction of the trend to see where the market might retrace too. This results in a series of lines drawn horizontally across the chart that the price may be supported or resisted at if price reaches them (See Figure 1). Common retracement levels are 38.2%, 50%, 61.8% and 78.6%. This means that after a move in either direction, equalling 100%, the retracements may be 38.2% or 50% or so on, back in the opposite direction of the 100% move. I.e. If the full move reversed then this would be a 100% retracement.

Figure 1 - Fibonacci Retracement Ratios

The problem is that as the price retraces, there can be five or more retracement levels of possible support/resistance. How do you know which level the market is most likely to turn at?  More importantly, where is a good place for you to enter a trade?  The answer is you don’t know yet; there is no high probability trade with only this amount of analysis.

This has led a lot of people to say that Fib is subjective and they argue the point valiantly. Well the truth is, it is subjective!  But only for those people who don’t have a precise strategy for how to use it. If you cannot pinpoint a trade with precision, i.e. the exact retracement level that you would like to buy or sell at, then you do not have a trading strategy. All you have is a very subjective and virtually useless (IMHO) trading tool.

So, lets cover how you can pinpoint the precise Fib retracement level that has the highest probability of the market turning. To understand the full trading strategy you must first understand trends at the basic level…

Trend Analysis
Simple trend analysis is perhaps the most straightforward, most important and yet most over-looked technical tool at our disposal. Time and time again I meet traders who skip over it because they think higher highs and higher lows it is ‘too simple’. They think the advanced stuff (such as Fibonacci) is what will make them more money. This could not be further from the truth!  Without a grasp of the basics, the advanced stuff never quite makes sense either.  Correct trend analysis is, in my opinion, the most important thing that a trader can ever understand. It is also necessary for drawing Fib lines correctly (no wonder so many people think Fib is subjective when so many don’t yet understand trends).

An uptrend is:

• A series of higher highs (HH) and higher lows (HL). See Figure 2.
  An uptrend is over when this trend reverses. I.e. The price makes either a:
• Lower high (Figure 2 Point A) and/or;
• Lower Low (Figure 2 point B)

Figure 2 - Uptrend