Identifying perfect entry and exit points using Fibonacci Retracement

Hey friends, welcome to Stock's Knows. Today we will understand about a charting tool which is commonly used by technicians to identify perfect entry and exit points in any trade. Finding perfect entry and exit point is as much important as finding a perfect stock to enter. 

Because if you find perfect stock but you entered at the wrong point, it will cost you money. 

Hence we need to find perfect entry and exit points to enter into any trade.

What is the Fibonacci Retracement Tool? 

The Fibonacci Retracement tool is a perfect tool for identifying entry and exit points. It divides the verticle distance between recent low and high into levels of 23.6%, 38.2%,50% and 61.8% from the high point.

These all levels work as Support or Resistance levels, falling price may arise from any of these levels or rising price may fall from any of these levels.

We all know that market does not move in straight line, it always moves in a zig-zag way. 

In an uptrend or a downtrend, you will find some pullbacks or corrections. These pullbacks or corrections are good opportunities to enter or exit in any trend.

Among all of these, 50% level is a level up to which average correction or pause of any trend happens as per Dow theory. 

Ex. If a stock has started uptrend from 120 and made high of 200. 50% level will be at 160.

        50% level = 0.5*(High - Low)+Low 

                  = 0.5*(200 - 120)+120                       

                  = 160  

                        or

        50% level = High - 0.5*(High - Low)                   

                  = 200 - 0.5*(200 - 120)

                  = 160

Remaining all levels are Fibonacci levels which founded from Fibonacci numbers. Correction of the trend may happen up to those levels.

In an Uptrend, rather than entering at any point you should wait for correction up to a level from all of these levels 23.6%, 38.2%, 50% and 61.8%.

Best buying level in the correction of an uptrend is at 50% of the distance between recent High and Low. In above example around 160 level is the best to enter in an uptrend. 

But in all uptrends or downtrends, you will not get 50% correction, but you might get the correction up to 23.6% or 38.2% or 61.8 %.

The dippest correction would be up to 61.8% level. If price breaks that level, it is the indication of the trend change. 

And the smallest correction of an uptrend is around 23.6% level. Entering in an uptrend around 23.6% level is also be profitable.

A correction up to 38.2% level is considered a medium correction.

Below are some examples of entry and exit points around various levels.

1) 50% level as bullish Signal:
i)In this case, price successfully fell below 50% level and after trading below 50% level it successfully crossed above the 50% level, which is the bullish signal. One can enter long at this level.

Image Source: Investing.com

ii) It is another case of a bullish signal of 50 % level. It is the case of an uptrend which is corrected up to 50% level. It reversed from 50% level. One can go long above 50% level. 

Image Source: Investing.com

2) 50% level as a bearish signal:

 i)In this case, the price fell below 50% level, which is a bearish signal. One can go short below 50% level. Until price will not cross above 50% level bearish trend will continue.

Image Source: Investing.com

ii)This is another case of a bearish signal from 50% level. In this case, rising price wasn't able to cross 50% level and fell from there. Which is also a bearish signal. One can go short below 50% level.

Image Source: Investing.com

3) 23.6% level as smaller correction level. 
In this case, uptrend corrects up to 23.6%. This shows a healthy correction of 10% from high. Holding 23.6% level is a bullish signal. One can go long around this level. 

Image Source: Investing.com

4) 38.2% level as medium correction level. 

In this case correction of an uptrend up to 38.2% level or 15% from high. This is the medium correction in an uptrend. One can go long around this level.

Image Source: Investing.com

5) 61.8% level as deeper correction level.

This is the deeper correction as compare to above all. 61.8% level is critical level because if price holds this level it is bullish signal and uptrend may continue but if price broke this level it is clear indication of the trend may be changed from up to down. Hence one needs to strictly watch the activity around this level.

Image Source: Investing.com

Note: For perfection, one need to use Fibonacci with indicators and candlestick patterns which will improve performance.

These were all about Fibonacci retracement tool. If you find helpful above information then please Share our article and Subscribe to the newsletter of our blog.