As with all technical tools, Fibonacci retracements dont always work out if youre looking for that last extension to fulfill a given price target. But Fibs do serve as a reliable reference point for potential trade entries.
For instance, if youre looking to get in on a pullback, how far back must price go before you might consider it safe to enter? Many traders who use Fibs are typically looking at three reference points--38.2%. 50%, and 61.8% pullbacks.
The 50% pullback is an interesting zone. If you think about it, those who are long from the bottom are holding an unrealized gain, while those who sold short near the top are also at a gain. The 38.2% pullback may be a bit too close to the peak (or trough if you are going short), but price has been known to bounce of that level, Anything far past the 61.8% level, that is, within the 70% range or deeper signals trouble.
On December 24, 2018, Aurora Cannabis Inc (ACB) reached a low of 4.58. Later, on January 15, 2019, ACB surged to a high of 7.52 before pulling back.
Although it is much easier to see this now, as were viewing the chart retrospectively, when price began pulling back, plotting a Fib retracement might have given you the levels to anticipate (along with the corresponding prices) to time an entry, assuming you wanted to go long.
As soon as priced dipped below the 38.2%, a swing trader might have begun placing buy stops above the high of each bar. If that were the case, a swing trader might have entered at , around the 6.35 and 6.44 price range during the breakout (see blue arrow). Note that price barely pulled back to the 50% level, which may still be considered a decent pullback.
As a swing trader, you might have sought a short-term profit. So, two likely price targets might have been the 7.52 peak of the last swing , or the November 2018 high of 8.12 as shown at .
As mentioned at the top of this article, Fibs dont always work out. They sometimes fail, as in this Quaker Chemical Corp example (KWR).
More on KWR in our next post.
As for now, in the case of our previous ACB example, a smart stop loss level might have been either below the most recent swing low of 6.11, or somewhere near the 70% range of 5.45.
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