Trading forex with the trendTrends are great profit-making opportunities. They are directional, but usually include ranges that provide you a chance to hop on board at numerous stages.
Even though trends are directional, they tend to move in a step-like progression. Large trend moves are followed by smaller corrections within the trend. For retail forex traders in a position, those corrections can be both painful and confusing. Corrections can increase uncertainty; uncertainty increases anxiety; anxiety increases fear; fear is a trader’s worst enemy. It is hard to trade well with heightened fear.
During the corrections, many retail forex traders get themselves turned around. Instead of waiting the corrections out and buying a dip on an uptrend, or selling a rally on a downtrend, the temptation is to sell a corrective low or buy a corrective high. In doing so, traders can get out of sync with the trend and find themselves in a cycle of repeatedly trading against the trend.
Fibonacci retracements are a technical tool that can give traders a much-needed framework for trading forex trends. They specifically can help traders stay on the trend when the trend is strong, and exit the trend if the clues suggest the trend is over.
Makings of a trendA trending market occurs when there is an imbalance. The imbalance is caused when the buyers are overwhelming the sellers in an uptrend, or the sellers are overwhelming the buyers in a downtrend. Typically, the imbalance originates from the forex market’s largest and most capitalized traders. They have the firepower to introduce imbalance to an otherwise balanced market.
Conversely, retail traders typically cannot cause a trending market. They can participate in a trend and benefit greatly from a trending market, but do not have the capital to move the market in a trending direction for a prolonged period of time.
Because most retail traders do not see the actual large money flows that cause a trend to start and continue, they rely on technical tools as a proxy for measuring trend strength. This is where Fibonacci retracements come into play.
Retracement zonesStrong trends do not move in a straight line, but take steps higher (or lower). A trend move consists of a fast and directional move higher (assuming an uptrend), followed by a smaller correction to the downside. The corrections typically are caused by traders who are anxious to take profit and counter-trend traders who are trying to pick a high extreme. The combination swings the market to the downside for a period of time. If the market is in a strong uptrend, typically there are measurable characteristics for the corrections within that broader trend.
Most traders know that there are a variety of Fibonacci retracement levels that can be applied to trend moves as a way to measure corrections. These levels also can be used to measure the strength of the trend.
The first key retracement is the 23.6% level, followed by the 38.2%, 50%, 61.8%, 78.6% and 100%. Although charting purists say all are important, in trending markets experience shows that the 38.2% and the 50% levels are the most relevant. The area between these two Fibonacci levels can be termed the “Correction Zone.”
If the Correction Zone can hold after a trend move higher, it says two things about the uptrend: Buyers likely are well-capitalized traders who are supporting the market at the discounted retracement price, and the counter-trend sellers are not taking back control.
Conversely, if the market trends higher, then corrects below the Correction Zone, it says: Capitalized buyers who forced the market higher were not committed to the trend totally, and sellers (who also may be well capitalized) took back some control.
When this happens, faith in the trend’s strength diminishes. Also it may be time to exit the position and reevaluate the market.
Trends consist of big steps followed by smaller corrections. If the smaller corrections are able to stay within a Correction Zone as defined by the 38.2% and 50% Fibonacci retracement levels, traders can look to take another step in the trend’s direction. If the Correction Zone gives way, traders can use the clue to exit positions. Step through the trends by measuring Fibonacci retracements. You will stay on the side of the trend and ultimately make more money in the markets.
FX - tradinglobal