Being able to spot patterns (and enter and exit correctly) can make all the difference in a trader’s journey.
A few weeks ago, I talked about three chart patterns I like — Bull flag, Cup and handle, and the Fibonacci retracement.
Today, I want to talk about the classic Fibonacci setup and how I played my recent successful trade.
Before we talk about the example, let’s quickly go over the Fibonacci Retracement Chart Pattern.
At first glance, this strategy sounds a bit more complex than the others, but like most things…if you study it closely, it starts to make sense in no time.
Fibonacci retracement is a technical analysis tool in my arsenal that I frequently rely on for finding areas of support and resistance levels (or reverses in price).
Most traders like to use this strategy with other chart patterns like the bull flag or technical indicators like moving averages.
Before we talk about what it looks like, let’s understand where the name comes from.
Fibonacci retracements are calculated from Fibonacci ratios which are derived from the Fibonacci sequence.
Here’s a simple refresher — starting from 0, and 1, the Fibonacci sequence is formed by adding the last two numbers to get the next number.
Which results to 0, 1, 1, 2, 3, 5, 8, 13…till infinity.
Now what’s unique about these set of numbers is that;
Every number in the sequence is roughly 61.8% of the next number in the sequence.
Every number in the sequence is 23.6% of the number after the next two numbers.
Every number in the sequence is approximately 38.2% of the Fibonacci number two steps ahead.
What does all this have to do with trading?
Well, when a stock is trending very strongly in one direction, traders using the Fibonacci indicator believe that the pullback will be equal to one of the percentages within the Fibonacci retracement levels — either 23.6%, 38.2%, or 61.8%
Here’s a quick example; if a stock’s price jumps from $20 to $21, the pullback is likely to be roughly $0.23, $0.38, or 62 cents.
As you know, a good time to enter a trade is when the stock is going through a pullback.
So if you see a stock drop by 38 cents (a Fibonacci ratio) from say $31 to $30.62, that may be a good opportunity to buy, as the stock will likely bounce back up.
Another example: If it jumps from $40 to $50, then it will be in increments of 10. To calculate the 61.8% Fibonacci level, multiply $10 by 61.8% (10 x 0.618 = 6.18) and subtract the result from $50 to get the 61.8% level ($50 – 6.18 = 43.82).
Real-life example with yesterday with CYRN
Cyren Inc. (CYRN) is a cloud-based, Internet security technology company providing security as a service and threat intelligence services to businesses.
On Thursday afternoon, while teaching live, I spotted this classic Fibonacci pattern and put an X around where I wanted to buy this cyber security play.
Then when it got to that point, I bought it.
The result was an over 20% gain yesterday. Click here to see all the details on my trading journal here.
This morning it’s the top stock on Wall Street, and even reported to increase by 30.32% in pre-market trading to 6.19.
You see, cyber security stocks are hot right now. Mainly due to Russia’s invasion and I intend to look out for more cyber trades, in particular CISO, as well as a few in the energy sector.
In this small account strategies section of your RagingBull dashboard, I included a video where I go into more details and break down how this strategy works with another good example.