Trading with the fibonacci. A important key to success when trading the Stock Market or Forex Market.

The Fibonacci is a tool for the serious trader. It can help predict profit points or a retracement can help define the swing low and swing high. The Fibonacci is well regarded for provide entry points with a high probability.

Fibonacci numbers were developed by Leonardo Fibonacci and it is simply a series of numbers that when you add the previous numbers you come up with the next number in the sequence. Here is an example:

1, 2, 3, 5, 8, 13, 21, 34, 55

When you add 1 and 2 you get 3? Now add 2 and 3 and you get 5, and so on. So how does this sequence help you as a swing trader?

Well, the relationship between these numbers is what gives us the common Fibonacci retracements pattern in technical analysis.

Stocks will often pull back or retrace a percentage of the previous move before reversing. These Fibonacci retracements often occur at three levels – 38.2%, 50%, and 61.8%. Actually, the 50% level really does not have anything to do with Fibonacci, but traders use this level because of the tendency of stocks to reverse after retracing half of the previous move. Here is an example using a graphic explaining the retracement pattern…

Read more in Investing
« Do You Need Extra Protection?
How to Find Stocks for a Recession? »

The Fibonacci tool should be used in conjunction with the trend. I play the “Fibs” in conjunction with higher highs, higher lows or Lower highs and lower highs. If a security is making higher highs and higher lows, I want to play it to the upside. I wait until my target area is hit (most likely the 50% retracement). I add support to the equation and pull the trigger.

If the trade goes your way and makes another higher high its decision time. Are you going to stay in the trade and risk the pullback or do you take profits and wait for the

Price to hit another projected pivot point on the fibs.

Chart patterns, support, and resistance should be used with the fibs to help maximize profits. If the chart has a double top it would be more prudent to exit the trade with profits and perhaps play it on the short side. Head and shoulder patterns would also make sense to exit the trade and wait for the next set-up to occur.

In order to make a profit at some point you will have to sell. Scaling out of the trade could also make sense if the trend is really strong and the bulls are running wild. If the aforementioned patterns set-up I will go out of the trade and take my profits.