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How to use Fibonacci Trend Based Extension Indicator?

In this blog, I am going to explain how to use Fibonacci Trend Based Extension Indicator with practical example. Please note this article is for educational purpose and not a buy/sell recommendation.


The upcoming Price Action Simplified course with mentorship support is scheduled on 27 and 28 January, 2024 only for 50 participants. Join only if you wish to learn and become confident of trading.



Meaning:

The Fibonacci Trend-Based Indicator is a technical analysis tool used in financial markets to identify potential trend reversal or continuation points. It is based on the Fibonacci sequence, a mathematical concept that has found application in various fields, including finance. Traders and analysts use this indicator to make informed decisions about buying or selling assets, taking advantage of the natural retracement levels observed in financial markets.


Objectives:


1. Trend Identification: One of the primary objectives of the Fibonacci Trend-Based Indicator is to identify the prevailing trend in a market. It helps traders determine whether the current trend is bullish or bearish.


2. Support and Resistance Levels: The indicator aims to pinpoint potential support and resistance levels based on the Fibonacci retracement levels. This assists traders in identifying areas where the price might experience a reversal or continue its current trend.


3. Entry and Exit Points: Traders use this indicator to find optimal entry and exit points for their trades. By recognizing key Fibonacci levels, they can make more informed decisions about when to enter a trade to maximize potential profits and minimize risks.


How to Plot it ?

To plot the Fibonacci Trend-Based Indicator, follow these steps:

1. Identify the Trend: Determine the current trend in the market, either bullish or bearish.

2. Select Swing Points: Identify significant swing points, such as peaks and troughs, in the price movement.

3. Draw Fibonacci Retracement Levels: Using a charting platform, draw the Fibonacci retracement levels from the low to high (in an uptrend) or high to low (in a downtrend). Common retracement levels include 38.2%, 50%, and 61.8%.

4. Analyze Key Levels: Pay attention to the key Fibonacci levels, as they often act as support or resistance. These levels may indicate potential reversal points or areas where the trend is likely to continue.


What are its advantages?


1. Objective Analysis: The Fibonacci Trend-Based Indicator provides a systematic and objective method for analyzing price movements. It relies on mathematical principles, reducing the subjectivity often associated with technical analysis.


2. Widespread Applicability: This indicator is applicable across various financial markets, including stocks, forex, and commodities. Its versatility makes it a valuable tool for traders in different sectors.


3. Alignment with Market Psychology: The indicator aligns with market psychology, as it reflects the natural ebb and flow of buying and selling pressures. Traders often find comfort in the predictability of Fibonacci retracement levels.


4. Risk Management: By identifying potential support and resistance levels, the Fibonacci Trend-Based Indicator assists traders in implementing effective risk management strategies. This includes setting stop-loss orders and determining risk-reward ratios.

Example : PSU BANK Index Weekly chart

In analyzing the PSU Bank Index (CNXPSUBANK), the current market price stands at 5860. Observing the Bank Nifty chart, a Swing low at 4340 led to a subsequent upward movement of 1073 points, reaching a Swing high of 5413. Following this, a correction ensued, retracting 772 points and establishing a low at 4641, marked by a hammer candle signaling the end of the downtrend.


With the end of the retracement, potential future prices can be forecasted using extensions. Applying the 1.618 Fibonacci extension, the Bank Nifty is projected to reach 6401, indicating a potential 541-point increase above the current market price. This suggests a 9.2% upside move from the current level of 5860.


CNXPSUBANK
CNXPSUBANK - Weekly chart

In conclusion, the Fibonacci Trend-Based Indicator is a widely used tool in technical analysis, helping traders make informed decisions based on the natural retracement levels observed in financial markets. Its systematic approach and ability to identify key levels make it a valuable asset for traders seeking to enhance their analytical toolkit. Don't miss the upcoming Price Action Simplified course with mentorship support scheduled on 27 and 28 January, 2024 only for 50 participants. Join only if you wish to learn and become confident of trading.


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