Fibonacci correction, extension and projections are one of the most popular technical analysis tools in any retailer’s arsenal. In fact, Fibonacci Retracements are widely used by everyday traders and traders who swing in their trading settings. They are considered leading indicators unlike most other technical analysis indicators that are considered backward in nature.
Most of us as traders are familiar with the Fibonacci sequence of numbers obtained by adding the last two numbers to obtain the next number in the sequence starting from 0.1. So the Fibonacci sequence develops like this 0,1,1,2,3,5,8,13,21,34,55,89, …. and so on. These ratios of 0.382, 0.5,0,681,1,1.272 and 1,618 are considered very important in the formation of different levels of indentation, correction, elongation and projection.
In any trend, the price action tends to retreat or withdraw. This is also known as a Correction. Suppose we have an upward trend. The price action, when it starts from the lowest, will at some point try to consolidate by pulling back or pulling back to a certain extent, and then continue in the original direction. These re-steps or corrections in most cases can be 0.382, 0.5, or 0.618 percent. So, if you failed to enter the uptrend at the lowest level, you can enter it at one of these levels.
However, sometimes the price action can still return more than 100%, which means that it can go beyond the original minimum of the trend. When this happens, it is known as the Fibonacci extension. Thus, the Fibonacci extension is a special type of correction or correction when the stock price is withdrawn more than 100%. This extension can reach as high as 1.272 or 1.618 percent.
The Fibonacci projection is a concept used to determine the levels at which a trend is most likely to be exhausted. Fibonacci projections are considered very important in Elliot’s wave analysis. This projection can be 1.618, 2.618 or even 3.618 percent and is used to determine momentum.
Now the pivot point is calculated by adding High, Low and Open of the specified time frame and then divided by 3. You can calculate two levels of pivot point support and two levels of pivot point resistance. If you are unfamiliar with pivot point calculations, you should read my article on Pivot Points.
When trading pivot points, you plot these levels of support and resistance on a chart and see if the price action breaks that support or resistance or keeps them. Suppose you are trading a 30 minute chart. You draw the level of support and resistance in the center of rotation. Price action rises and hits resistance by forming a doji. Doji is considered a bar of indecision.
Now, if the price action starts to fall later, you can understand this as a sell signal with a stop placed near the highest level of the doji. When to go out? You can drag the retracement levels 0.382,0,5 and 0,618 to see where the price action will complete the retracement. This way you can keep your emotional control and not let the trade end prematurely. After all, Fibonacci retracement combined with pivot points can be a powerful combination you should master. Good luck!