Some traders don’t like trading breakout formations.
They are uneasy buying new highs and often convince themselves “the move is already over.”
Try as I may to sway them to the contrary, the fear persists. And they usually end up abandoning the trade on the first sign of weakness.
For these individuals, and anyone else who prefers buying pull backs, there are other options. The next price action pattern is a perfect fit for anyone with a low risk tolerance.
What is the Fibonacci Retracement?
It’s called the Fibonacci Retracement. If you’re not familiar with the philosophy, it is based on a series of numbers developed by Italian mathematician Leonardo Fibonacci in the 12th century.
What did a math nerd from the Dark Ages know about trading stocks? Well…nothing to be honest. But his 0.618 “Golden Ratio” sets up some of the most consistent entry points I’ve ever seen. And traders have been using it with great success for decades.
I don’t know that I subscribe to the full Fibonacci method, but what I’m about to show you is my personal favorite from its bag of tricks. Not only is it a precise science for getting into high momentum stocks, but it allows for extremely tight stops. In other words, you only lose a little when you’re wrong.
The idea is this…
Financial instruments tend to move in cycles. When a stock advances or declines by a given percentage, the odds of a reversal increase significantly. The Fibonacci Retracement tool identifies the levels with the highest chance of reversal while establishing precise support and resistance levels.
Let me illustrate this with some Forex currency pairs.
Where To Use The Fibonacci Retracement
This is a daily chart of the EUR/AUD from late 2014.