Fibonacci - the traders secret sauce, and how I use it

villagetrading (35)in #trading • 8 years ago

When I first started reading about Fibonacci numbers and their use in trading I was immediately skeptical and I still am.

There has been some investigation into their benefits in trading and the jury is out on whether they add any value, but I wanted to share my thoughts and some details of how I use them during trading and investing in crypto currencies.

If you forget all the rubbish about golden triangles and refer back to my first post you will see that the market doesn't just go straight up, it trends upwards in a series of peaks and troughs. The peaks I call 'local tops' and the troughs I refer to as 'retracements'. The troughs tend to retrace a substantial portion back from the initial peak - on average I would say they retrace back 2/3rds of the initial rise.

Of course we can easily see looking back on an existing trend and say where we should have bought and should have sold but nobody (apart from the Market Maker perhaps) could have predicted where the price was going to bottom out, or where the price eventually topped out.

This brings us to one of the tenets of trading (and investing), we propose to ourselves by looking at fundamentals (technology, team, community) and technicals (charts) that price should rise from here. Then we invest some resources (bitcoin or usd) into that proposal, set a limit to how much we are willing to lose of that initial investment before we admit we were wrong and then decide at what point we want to take our profits by converting back to Bitcoin or USD. This could be in one lump or in several over time, how you take profits and cut losses is all part of your trading plan, and this is all planned out in advance.

The Good Bit

Here's a recent example from a Factom rally that I participated in which I will be referring to the marked points on the chart

Entry (E)

I mentioned earlier that prices retrace on average about 2/3rd's of the initial rise and it turns out there is a tool that many traders use called the 'Fibonaccia Retracement Tool'. It comes preset with 61.8% and 78.6% retracements and
pretty much directly in the middle of those 2 numbers is our magic 2/3rd's. If I am extremely bullish on a market and I really want to get in on the action I buy at the 61.8% retracement, if I am not so bothered but still think it's going up then I use the 78.6% retracement, and most of the time I use a figure roughly in between - 70%

Stop Loss (S)

Now for managing risk - I setup a stop loss to protect capital . In the Factom example, just under 10k was a good point . It is a good practice to always place Stops and only ever move them upwards, but beware of placing them too close in case they get triggered by a flash dump.

Profit Taking

I'll cover this in more detail in later posts, but we are working on the basis in our trade that price is going to break the Top marked (T) on the chart. Either the stop is hit and we're out, or the Top is broken, I do not sell before this point unless there is some marked change in the fundamentals that completely invalidates the trade.

Relax

Relax
All the above activity can be achieved without sitting at your computer all day watching the price. I set Orders on the exchange and let the trade play out over time. There is very little point constantly monitoring the markets all day long, and in many cases this will be detrimental to your trading as you should have a plan and stick to it. If you are sitting there watching price all the time you may get shaken out of the market by a whale dumping the price down to near your entry price or lower.