Among the many tools that technical traders utilize, none is more prized than Fibonacci retracements and extensions. By now, I’m sure that most traders are at least vaguely familiar with the origin of the Fibonacci sequence. If not, here is the quick version; mathematician Leonardo Fibonacci identified the sequence in the 13th century. He was actually trying to calculate how many rabbits he could breed when he discovered this sequence of numbers. Nonetheless, the Fibonacci sequence has become the basis for many applications in our society. Today we will be discussing how the Fibonacci sequence is utilized in various aspects of trading.

This sequence isn’t nearly as important as the mathematical relationship between the numbers in the sequence. The Fibonacci retracement numbers used in trading are derived by dividing the prior number in the sequence by the next number. For example: 61.8% is a very important number in the Fibonacci sequence for traders, 55/89 = 0. 6179 and hence you arrive at the Fibonacci retracement number of 61.8. There are other important Fibonacci retracement numbers and they are 38.2%, 50%, and 61.8%. These are the most common numbers used by traders.

Generally speaking, traders will draw a line from peak to trough, or trough to peak, depending on whether the market is moving up or down. They will then calculate where 38.2%, 50%, and 61.8% fall on that line drawn. These days though, nearly every charting program automatically calculates these Fibonacci retracement levels and inserts them for the trader.

There is no sound theoretical backdrop for why these numbers are so important in trading. Some traders feel that the Fibonacci retracement numbers are natural stopping points for price movement based upon trader emotion, while others believe that because of the widespread use of Fibonacci retracements the market responds as a self-fulfilling prophecy. In my trading days I have listened to countless arguments as to the legitimacy of the Fibonacci retracements system. There can be no doubt that the market, more often than not, tends to respect these lines. Of course, the reason they respect these lines is not entirely clear.

But does it really matter?

In my trading, I do not concern myself with the “whys” of Fibonacci retracements as it is unimportant to me. The facts are simple; the market typically pays close attention to these lines and therefore I pay close attention to the lines. In essence, it is a chicken and egg argument. I don’t care if the chicken came first, or the egg came first, I know that these lines are of importance and I regularly chart them.

The lines formed by the Fibonacci retracements are generally referred to as support and resistance. Support refers to the levels to the downside that the market moves, and resistance is the point where the price stops when moving upward.

Does the market always respect Fibonacci retracement price levels?

Unfortunately, the answer to this question is no. This is one of the confounding aspects of Fibonacci trading. While the market often, even usually, respects the price levels of the sequence, there are times when the market blasts through the support and resistance line as if they were not even there. So often times the trader is forced to decide whether the market is actually trading through the resistance levels or going to honor the resistance levels. It can be a tough call, at times. By and large though, the market pauses (at the very least) at the Fibonacci levels.

In summary, we have looked at the way the Fibonacci sequence was discovered in learn how to calculate the Fibonacci retracement levels. Generally speaking, these levels represent support and resistance when they are drawn from peak to trough, or trough to peak. It is unclear exactly why Fibonacci retracements function as they do, but they function with enough frequency that they draw the attention of most traders, especially technical traders.

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It goes without saying that every e-mini day trader prefers to trade a trending market, they are the easiest to trade and have the highest probability trades for success. Unfortunately, markets tend to trend only about 30% of the time. The remainder of the trading session consists of normal backing and filling operations, sometimes referred to as “market noise.”

As a e-mini day trader, I prefer to avoid trading during periods of market noise over trending markets, which only makes sense. But there are times that the market presents some trading opportunities during periods of consolidation. From the onset, though, I’ll recommend very conservative e-mini trading techniques in consolidating markets as the price action can be very unpredictable. Specifically, I would trade fewer contracts than normal and make sure that a trade does not run away to the downside from your profit target. Of course, this is easier said than done and it takes extreme vigilance to successfully day trade periods of market noise. But it can be done.

1. The optimal e-mini consolidating market will follow a repetitive serpentine pattern rising and falling at nearly the same level in each cycle. Using strict scalping technique, a e-mini day trader can do quite well as the market tends to stay in these cycles for extended periods of time. The technique to day trade this type of market is relatively easy; you would place a support and resistance lines at the peak of each cycle and the trough of the cycle. I generally set my stops tighter than usual when employing this technique and set my profit targets to whatever length the cycles are averaging. Obviously, if the peaks are occurring 12 ticks from the average trough, it would be unwise to set your profit target at 26 ticks. Using oscillators, you can generally target the peaks and troughs and trade them accordingly, either long or short. I have made a good deal of money trading and this particular style.

2. If is the consolidation period is narrowing into a wedge shape, I will often put buy and sell orders one point above and below the range of the narrowing market. In doing this, I can take advantage of any breakout or breakdown that will occur. Consolidating markets that show a tendency to narrow are often followed by a significant breakout or breakdown. By putting a buy order above the established range, you will pick up the trade if it breaks out long. Just the opposite, by establishing a sell order just below the range of the consolidation, you will pick up a breakdown in the day trading action and potentially capitalize on it. This day trading technique can be very effective, but does carry some risks should the market widen just a bit and then return to the consolidation pattern.

3. There are some consolidating patterns that are indecipherable in terms of patterning. My recommendation is to avoid trading this sort of consolidating market, as the traders have not established any sort of discernible pattern during the period of market noise. At best, this type of consolidation pattern is treacherous. As I said, I avoid market noise that displays a high degree of randomness in the price action.

In summary, all e-mini day traders prefer to trade trending markets. But there are some non-trending markets that display enough movement and enough predictability where a trader can be effective in choosing potential trades. However, all consolidating patterns are not created equally and highly random consolidation patterns should be avoided.

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PMP Limited endured a doubling bottom. The technical share price target is calculated by using the following calculation. With the double bottom shaping you commence by adding the change among the first bottom (B1) and the reply high. Following the second bottom, the recent reaction high is the new breakout point. It is main to be mindful that for a double bottom to be confirmed the stock rate need break through the answer high and over and done.

Technical Signals

1. Prior Trend: similar more reversal patterns, there should be a tendency presents to reverse.

2. First Trough: The first trough has to symbolize the lowest point of the assign trend. The first trough is clearly in a down trend and normal in its development.

3. Peak: second the opening trough a bounce occurs and a reaction high is created. Usually it is between 10 and 20%. The Volume in the short rally is of no consequence. The high is often rounded in appearance as it lacks support to go on and rally higher, the price falls to the second bottom.

4. Second trough: the fall in stock cost of the answer high eventuates on extremely little volume and that’s when it equals the recent low or bottom (B1). Whilst this price appears to be supported, the double bottom has not played out yet and time will see it eventuate.

5. Progress from trough: the double bottom makes the volume levels further key than a double top. It requires clear evidence that the volume and the accumulation pressure is rising upon the stock price advancing from the second trough or bottom (B2). The price might gap up, this will show signs of positive sentiment and traders will return seeing that opportunity waits.

6. Resistance Break: while the price trades up to the resistance high, the double top and trend reversal is not fulfilled. The breakout from the resistance high (within the troughs) completes the double bottom design. The latest rally higher should have accelerated movements on with above intermediate volume.

8. Resistance Turned Support: Quite often the broken resistance level develops into a brand new support level; there is often a retest of this support level. This retest offers a second opportunity to close out a short position or enter a new trade to the upside.

9. Price Target: The technical share price target is calculated by using the following calculation, with the double bottom formation you start by adding the difference between the first bottom (B1) and the reaction high. Subsequent the second bottom the late retort high is the new breakout point. The bigger the formation the bigger the opportunity for a probable advance higher.

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