Many people ask me if Fibonacci retracements and extensions really work when it comes to trading, and to the that I have the following answers. First off all I would recomend that you go and read my article on How to use Fibonacci Then come back here and we’ll discuss this further. I think everyone knows that price moves in a retracement type fashion in any direction accept when it’s trading in a range bound channel. If price is going up, it tends to
do so in a series of what we call  impulse’s and corrections..

 

Introducing Technical Analysis 101 - Fibonacci Indicators by DayTradersGroup.com

There are many different scenarios this particular pattern could be apart of, but the potential for the application of Fibonacci retracements and extensions lies in not only this 5 wave move up, but also and especially in the overall correction of this move. You see although this is 3 impulse waves, and 2 corrective waves, on the larger scale its one
impulse wave.

Here’s what I mean:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notice the corrective wave in red – (Fibonacci retracements in action – larger scale)

5 Rules of Engagement to MASTER Fibonacci Chart Plotting

Fibonacci retracements represent an excellent tool for investors, identifying potential reversal points on a price chart. Anyone can see that on any historical price chart, trading prices will inherently pull back or retrace a percentage of the previous movement before reversing again and then proceeding in the
direction of the overall long-term trend.

Historical observations demonstrate that these Fibonacci retracements seem to follow a Fibonacci ratio pattern. By carefully plotting these retracement possibilities on a historical price chart, a trader improves his or her probability towards successful investing. Certain rules are recommended to improve the
likelihood of identifying successful entry and exit points.

First Rule of Engagement  : Identify the High and Low

In order to use Fibonacci retracements the right way, it is important to identify relative high and low prices
on a historical chart. The longer the term that is utilized, the more likely the Fibonacci retracements plotted
will identify significant levels demonstrated support and resistance.

Rules of Engagement 2: Plotting the Fibonacci Retracements

Once a high and low for a time period has been identified, you lay out your Fibonacci retracements. The
low point would represent 0%, and the high point represents 100%. (A good rule of thumb with Fibonacci
retracements is to make sure that as price retraces, the levels are getting higher – ie; 23.6%, 50%. 61.8%
etc… Rather than lower.  If they are getting lower you laid them down the wrong way.)