(john parson)
Fibonacci analysis works with day trading to determine support and resistance levels within the Pivot Point areas as well as helping to forecast the projected ranges. The Fibonacci correction tool can be used as a way to identify if the trend will reverse or if the trend will continue.
Here is how you can put Fibonacci correction levels to good use while integrating them with pivot point support and resistance numbers.
This is a technique that is more in line with what day traders will encounter on a more frequent basis. as a system or rule based trader you need to wait until there is confirmation of a breakdown of either support or a conditional change in prices by a series of lower highs, lower closes than opens lower lows, closes below prior lows and most importantly you want confirmation of a sell signal when the market closes below the low of the doji. The trigger to sell would be on that candles close or the next time periods open, the stop would be placed initially as a stop close only above the high of the doji. Immediately we see instant gratification as prices plunge. But as what can normally occur is an upside correction that takes place, in this example the correction takes form of a consolidation period that lasts nearly one hour and forty five minutes. It is during this indecision period that can create havoc, doubt and uncertainty in which your mind starts to play tricks on you.
This is the consolidation period that generates indecision. At this point you have a good set-up, prices have violated support, resistance has held, there is a high probability pattern that you recognize that generates reliable price action, namely the Low close doji sell signal. But you are faced with these internal forces that may cause you to exit a well defined trade. After all you have a risk factor and a potential reward objective already mapped out. However this consolidation period is creating more and more doubt whether or not you should stay in the trade. Here is when you need to take advantage of the time the market is in the pause period and go to work.
You now have a distinguishable high and a low made. Using the Fibonacci ratios you determine the correction levels. As such you have identified that the 50% and the .618% Fibonacci retracement levels are holding the market down. Armed with this information you will not be surprised or forced to react emotionally when prices rebound but do not penetrate above these levels. As the chart shows, the correction hits the .618% retracement level and almost immediately prices collapse.
The market rewards the disciplined and patient trader, as such Fibonacci correction levels will help you to identify what I consider pattern traps. For the market to finally fall out of bed like it does this period of consolidation attracted buyers and that congestion pattern when it fails to support forces these traders to sell like mad.