The Importance of Fibonacci levels in Trading

If there is one thing in the whole technical analysis panoply of tools, we would choose the Fibonacci retracement percentages ladder. It is not the place to enter into the theory behind these numbers but it is always amazing how well their use will help the trader-investor in his efforts to understand the markets gyrations. 

There are many applications in which we can apply one variant or another of the Fibonacci numbers and their relationships, but our preferred one is this power of theirs to predict levels of retracements in a corrective phase. 

In the classic technical analysis methodology, a correction should be between a third and two third of the previous move. Less than that, it would be viewed as a part of the trending move and not a correction. More than that would be considered a "deep correction" with a tendency to treat it as the first sign of weakness in the prevailing trend. The Fibonacci counterpart of one third is the 38.2% area and the one for two third is the 61.8% area.

Furthermore, the 50% retracement is considered the most common in the financial world of assets. Half is a nice point of reference and it seems at times that it is a prophecy that is fulfilling itself. So many traders look for this area for a re-action in the price, that many of them will come and buy or sell in this exact point. By doing so, they are creating the effect that they are waiting for.

Our visual aid is the weekly chart of the USDJPY with a daily chart insert. Look how many price moves have been retraced by EXACTLY 50% (back, blue, light green) and EXACTLY 61.8% (violet, orange). You can also find many more in the daily and intraday time frames.

How can we use this feature effectively? First, the trader should understand that the price and only the price is giving signals to go long or short. Any other indicator or tool is only helping. Some a bit more than others and we consider this one a great help. So, the thing to do is "to be ready" when the price arrives near the Fibonacci percentages.

If the correction suddenly stops and reverse, it is a good sign that the old trend is returning and to enter a position in its direction. Such a position should be protected by a very tight stop-loss over or under the Fibonacci level that was the limit of the reversal. For example: in the black correction (end of 2002) the trader would be prepared from 124-5. When the price did break the ascending channel, the trader should have taken a short with a SL at 125.75.

What about now?

The daily insert shows that the current correction up did not yet reach the 50% Fibonacci retracement. In view of the history in this pair, it is safe to say that there is a way to go to the upside for the USDJPY. We should be ready near 115-116 and then near 118 for the end of this move. If the JPY will go further, we should consider that a change in the main trend is in the cards.

Day Trading Versus Swing Trading In Forex

If you are a novice trader, this should be one of your important questions that if you should be a day trader or a swing trader. It is a little hard to decide at the beginning and sometimes even after two years of practicing you still don’t know if you like to be an intraday trader or a swing trader.

What is day trading?

Day trading or intraday trading means taking positions during the day, closing them by the end of the day and not leaving any open position before going to bed. It means whether you make or lose money, your positions are all closed before you go to bed or at least you move your stop loss to where the profit you have made is protected and you just want to make some extra profit, if possible.

For day trading, you mainly have to use small time frames like 30min and smaller and it is not possible to trade intradaily using big time frames like daily or even 4hrs.

What are the day trading advantages?

The first and most important advantage of intraday trading which is also the most important reason of choosing this trading method by many of the new traders is that in intraday trading you do not leave any of your positions open at the end of the day and when you want to turn off your computer.

Most novice traders can not have any open position when they go to bed. They cannot tolerate the stress. One reason is that they take too much risk, or they do not set a proper stop loss, or they trade with the money that they can not afford to lose. So if the market goes against them while they are asleep, they lose a lot and that is why an open position ruins they comfortable sleep. And of course the other reason is that they are not experienced enough and forex trading is still stressful for them.

The other thing is that most novice traders think that if they work with the smaller times frames, they will have more trading opportunities and they can make more money. They do not want to miss any of the market ups and downs and so they work with the small time frames.

There is nothing wrong with intraday trading if you do not take too much risk, set a proper stop loss for your positions and trade with the money that you can afford to lose. But if you make these terrible mistakes, even the smaller time frames that provide more trading opportunities cannot help you to make money and you lose all the money you have in your account. Money management is the most important aspect of any trading method that you can have. If you do not follow the money management rules, you can not survive in forex jungle.

Swing Trading:

In swing trading, traders use the bigger times frames like 4hrs, daily and even weekly and monthly. Naturally sometimes you will have to leave your positions open for several days or even weeks. Most of the experienced traders prefer swing trading. First because they have already tried all other kinds of trading methods and they have come to this conclusion that they are more comfortable with the bigger time frames and trading with these times frames makes enough profit for them. They have become able to control their greed and so they don’t want to take all the market ups and downs. They believe that small times frames may give them some more trading opportunities, but more trading opportunities doesn’t necessarily mean more money. Sometimes it means more losses.

On the other hand, they do not like to sit at the computer the whole day. They have learned that it doesn’t make more money for them, or even if it does, they are happy with less profit that comes through several hours of less working and struggling.