You have been studying the chart of Copart (CPRT). You noticed a number of things – notably that prices move in waves and they tend to bounce off at certain price levels. Why do prices bounce off these price levels when they aren’t significant support or resistance zones? Is there something that you don’t know?
There are a handful of indicators which act like an X-ray. These indicators allow you to look into the smaller support and resistance zones providing you with a prediction on the possible turning points.
They are the Fibonacci Retracement and Fibonacci Extension indicators. Both of them are derived from the Fibonacci sequence (aka the fingerprint of God).
Let’s discover how these 2 indicators can improve your trading results!
Fibonacci Explained
What Is It?
The sequence of numbers, starting with 0 and 1, is created by adding the previous two numbers up to infinity. Eg. 0, 1, 1, 2, 3, 5, 8, 13, 21…
The Fibonacci levels are 23.6%, 38.2%, 61.8%, and 78.6% (or 0.236, 0.382, 0.618 and 0.786).
When Do You Use These Indicators?
#1 Determine entry zones with Fibonacci Retracement
#2 Determine profit target levels with Fibonacci Extension
Geek Speak (skip this section if Math gets you dizzy)
The table below shows the Fibonacci sequence and the golden ratio of 1.618 showing up.
From the inverse ratio, you can tell that the main levels are 0.5, 0.618 and 1. Did you notice that 0.618 is also a Fibonacci level?
Going back to the golden ratio (1.1618), this is present in nature such as shells, flower seed heads, tree branches…
And our fingers!
Isn’t the golden ratio fascinating? Ok, I got carried away. Let’s see how the golden ratio applies to trading.
2 Fibonacci Applications To Improve Your Trading Results
The following images are the same chart of Copart (CPRT), with the different Fibonacci indicators used.
#1 Determine Entry Zones With Fibonacci Retracement
Do you now see why prices bounce off at certain levels even if they aren’t at significant support or resistance zones?
After putting on the Fibonacci Retracement indicator, you can also tell that prices tend to pullback to the Fibonacci levels. Therefore, you should buy on the pullback (circled out below).
Combining this with price action, you increase your chances of success.
1 golden tip just for you: The retracement of any strong move should not exceed 50% (0.5).
#2 Determine Profit Target Levels With Fibonacci Extension
Let’s say you have bought CPRT at $85. After placing your stop loss level that’s based on the ATR indicator, you’ll want to place a profit target level. That’s where the Fibonacci Extension indicator comes in handy.
$85 was your entry price. Your immediate profit target level was $93.05 (Fibonacci level 1).
You may shift your profit target if CPRT continues to exhibit strength. In this case, CPRT has been showing signs of strength by constantly breaking out of the Fibonacci levels. Your next profit target will be $100.74 (Fibonacci level 2.618).
As mentioned above, combine this with price action to get a sense if the current market conditions have shifted to increase your chances of success.
4 Things You Must Remember
#1 Fibonacci levels are the X-ray to hidden support and resistance zones
#2 The golden ratio is applicable to trading
#3 Identify good entry points by using the Fibonacci Retracement indicator
#4 Identify profit targets by using the Fibonacci Extension indicator
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