Image illustrates 78.6% Fibonacci Retracement
from the 38.2%, 50% and 61.8% Fibonacci retracements, Fibonacci
the 78.6% Fibonacci
identify oversold (or undervalued) financial instruments that have a
brighter future or growing fundamentals. One can also use the same
Fibonacci retracement level to find overbought (overvalued) stocks
that are under pressure from their competitors (losing market share)
or degrading fundamentals.
Generally, hedge funds begin to buy stocks that are undervalued from that zone down to the 100% Fibonacci retracement level. One should never use the 78.6% Fibonacci retracement on its own. Always, one must use it in conjunction with the fundamental analysis. Note that it is the preferred Fibonacci key
level of the hedge funds, investment banks and professional position traders who are combining the technical analysis with the financials. Though, swing and day traders can also use it, they ought to do the same things like the big financial
markets players. If a financial instrument is fundamentally bearish, but rallies up to the 78.6% Fibonacci retracement level, it becomes a very interesting bearish candidate. The opposite is also true for those that are intrinsically bullish but pull back (under a low trading volume) to the same key Fibonacci level.
Using 78.6% Fibonacci Retracement As A Technical Trader
To avoid misusing the 78.6% Fibonacci retracement level as a technical trader, one must use it in conjunction with the rising and declining channels. Also be sure to check the next higher time frame after the set-up time frame.
For example, the price is in a declining channel on the daily chart, and rallies up to the 78.6% Fibonacci retracement level.
Though, it looks good on the daily chart, it is wise to check also the monthly chart before validating that daily chart
Fibonacci trading set-up.
If the price is in a rising channel on the monthly chart, but one wants to sell on the daily chart one ought to take defensive measures or skip that trade. For a day trader that identifies similar bearish set-up on the four-hour chart, he or she must check the weekly chart. And those using the same Fibonacci trading strategy on the hourly chart will check the daily chart. Check the fundamentals but also validate the set-up on another higher time frame.
Will you promise me that you will try your very best to adopt a more prudent approach when trading the 78.6%
Fibonacci retracement? Alright, you do not have to promise me anything, but make sure you do lose.
One can go to the monthly chart and check over the last five years if the stock often finds a support at the 78.6% or 100% Fibonacci retracement level. What one is trying to find out is the behaviour of those specialist traders who trade the same stock the same way years after years. So, if one recognises that the financial instrument often fail to find a support level at 78.6% level, it will not be a reliable candidate for the 78.6% Fibonacci trading set-up.
However, it does not mean that those that frequently turn around at the 78.6% Fibonacci retracement level will always do the same thing but they are just more reliable candidates. Furthermore, those that often reach the 100% Fibonacci retracement can sometimes turn around at the 78.6% Fibonacci retracement level.
Is that too much for you to take in? Do not worry, give it enough time and continue to improve.
If a losing trade does occur review it and find out the real cause of the loss. Ask questions like:
When a bullish financial instrument is declining from the bullish zone and reaches the 78.6% Fibonacci retracement level and fundamentals are still solid, (of course in a healthy financial market) bullish traders consider it oversold. In that instance, the bullish financial instrument that dips below the 50% Fibonacci retracement level is at the wrong place (in theory) because it has strong fundamentals.
In contrast, a bearish financial instrument that is rising from the bearish zone, and reaches the 78.6% Fibonacci retracement level with degrading or weak fundamentals (of course in a bearish financial market) is overbought. In that instance, the bearish financial instrument that rises above the 50% Fibonacci retracement level is at the wrong place (in theory) because it has unreliable fundamentals.
So there you have it, all that you need to know to master the coveted 78.6% Fibonacci retracement level.
It is now clear that one can not trade the 78.6% Fibonacci retracement level using the technical analysis alone. The best
strategy is to combine it with the fundamentals like the hedge funds and big financial institutions. Indeed,
as one understands more the ins and outs of the 78.6% Fibonacci retracement level, one will start trading it more
accurately. It is a Fibonacci key level like the 38.2% Fibonacci retracement level, but it demands more than just technical
trading skills. The best 78.6% Fibonacci retracement traders are those who fully understand it.
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This article is written by G. Beaulieu founder of http://www.dayprotraders.com.
An ordinary trader who delights in helping traders get something out of this messy financial market.
As always, I enjoy writing this article, and I hope you too will find it sweet like honey.
Happy Fibonacci trading to all. Feel free to check our dayprotraders YouTube channel for free