We utilize Fibonacci retracements in the exact same way that we use horizontal support and resistance. The key difference is that our entries and exits are based on the market penetrating any of the five Fibonacci ratios: 0, 38%, 50%, 62%, and 100%. This is identical to how we utilize the support and resistance levels. The only difference is that these numbers may not necessarily be at key points of support or sideways activity. Utilizing the Fibonacci numbers will give you a little more volatility in the triggering. When apply the Fibonacci tool on your computer, I suggest that you use a 30-day and a 60-day look at the market, picking from high to low. Since the futures contracts cycle so quickly, you have to be careful using longer time frames because of the smoothing factor. Every futures contract has a large gap in price between each month. On the longer-term charts these gaps are ignored, but in our trading we want to be careful basing our decisions on the smoothing effect. If we enter at the base of around 234 and use the first Fibonacci point at 38% as a target, 253, we realize that if the market fails to break through, we will exit immediately. The market makes a first run at the 253 level but collapses at the beginning of September. At the first sign of weakness, particularly this long down day, we exit the market. When the market consolidates around the base again, and fails to penetrate it, we have an opportunity to buy back in, still using the same Fibonacci targets. On the second run-up at the end of September, we see huge gap ups until the market exceeds all of the Fibonacci targets: 253, 259, and 264~TQF. Every time the market breaks through one of the Fibonacci points, it becomes more and more difficult to enter a new long trade. We begin to look for a failure at one of the Fibonacci points to enter a new short instead. The Fibonacci points are good just to give us a number to activate the decision we have already made, not to make a new decision. If the macro technical analysis is not in tandem with the market’s prices for the Fibonacci, follow the macro.
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resistance, horizontal support, smoothing effect, fibonacci retracements,
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