Using Fibonacci Analysis - Part two

In this section, I will discuss how to use a Fibonacci retracement to time trade entries and to control risk. This is done through identifying profit targets and initial stops or hedges. In the next section, I will go into more detail about how to move those profit targets and stops as the trade progresses.Fibonacci To see the first article in this series, click here. As with most analytical tools, there are many great ways to accomplish the same task. Analysis will vary due to individual risk tolerance, personal preference and experience. While I have included some specific ideas in this module, there is no satisfactory substitute for your own experience. Take the concepts I have shared here, and practice using and adjusting them in the live market. Timing Entries Fibonacci retracements are very productive for timing entries in the direction of the trend. However, defining the trend is where many trip up in their analysis. This can be simplified considerably by defining the trend simply as the price area that you applied the Fibonacci retracement to. Let’s look more closely at an example from the past. In the chart below, you can see the Fibonacci retracement level attached to the rally from November to December on the USD/CAD. Let’s assume for a moment we’re back in December and we’re looking at the chart at that time (the non-shaded area). [IMG]http://www.pfxglobal.com/beta/images/john/02222007cadsmall2.png[/IMG] USD/CAD Daily Chart We have a clear trend in that time frame, so its time to start looking for potential support levels. The retracement study has drawn four horizontal lines that correspond with each of the major Fibonacci levels I will be using. (If you are unclear where to draw the lines, be sure you have studied the first lesson and watched the video) Each of these lines is a potential candidate for support and an entry position for a long trade. But which one should we pay attention to? The answer is: we wait. The Fibonacci level does not become important until price reacts to it. Once that happens, we can take some action. In the chart below you can see that prices bounced neatly off the 38.2% retracement level. If we’re pretending again that we’re looking at this back in December, we’d determine that this looks like a great entry opportunity. Well, we can see what happened next in the chart below. We bounced off that support level, and after a short downside move after the first of the year, we got the long-term move we anticipated, all the way up to the peak. I want to make a quick note on the downside move, and trading emotions. Many, many traders let their emotions get in the way of their analysis, and they panic when they see a downside move against their trade. If we had panicked at the first of the year on this trade, we may have missed the long upside move we had predicted in our analysis. You should give your trades room to move. The market is volatile and rarely moves in just one direction. Before you exit a position early, make sure you have a good reason to do so. Be educated and prepared This historical example is great, but we’re looking at it in hindsight. When you are in the live market, even with proper analysis, you can’t always predict is going to happen. To really complete your analysis, and be prepared for the unknown, ask yourself these three questions. 1. What constitutes a bounce? 2. What is the initial profit target? 3. Risk control – where should a stop be set? To see the first article in this series and the rest of this article/video, click here: [url]http://www.learningmarkets.com/index.php/200901091251/Forex/Forex-Technicals/using-fibonacci-analysis-part-two.html[/url]