Fibonacci analysis is crucial for the modern trader, and almost all traders use re-tracking and extensions as part of their strategy. Over the years, they have proven to be extremely accurate in forecasting market movements, and this can help traders develop strategies to achieve greater profits. One of the best ways to make money while trading is by predicting price breaks. With Fibonacci tracking and extensions, breakthroughs can be accurately predicted, and when a trader uses an additional indicator to provide additional evidence, they can be sure when a breakout will occur.
Fibonacci recovery and expansion relies on a trader who chooses the low and high points of the trend. Once this is done, the Fibonacci analysis can be applied to a candlestick diagram and a number of key Fibonacci ratios will be presented in the candlestick diagram as horizontal lines. The lines help to design points of resistance and support and they can also be used to suggest when a breakthrough is likely to occur. The two key ratios are 38% and 62%, and often when a security is traded, it can bounce back and forth between those two ratios.
If this happens a lot and the market seems to be stuck between these two points, then re-adjustments suggest that a price break is inevitable. When a price break occurs, the price of a security will often move dramatically outside the ratios of 38% and 62% and the market will change significantly. The presence of price congestion between these two lines, created by the Fibonacci correction, suggests that the market price will move and this is the moment when the trader must act.
The trader can simply rely on the analysis provided by the Fibonacci adjustment, and if so, it would be prudent to place an upcoming purchase and sale on both sides at the current price with the corresponding stop losses. However, Fibonacci analysis is best used in conjunction with another indicator to confirm whether a breakthrough is likely to occur. Using the evidence for two indicators is a much more reliable strategy, because if the two assume that a breakthrough is likely, then this is likely to happen, but if they contradict each other, the trader must stay out of the market.
Bollinger Bands are excellent at predicting breakouts, and when they start to shrink, it’s a signal that a price break will occur. This behavior is known as Bollinger pressure, and if the trader correctly identifies it while noticing congestion in the Fibonacci correction, they can be pretty sure that a breakthrough is inevitable. By combining Fibonacci correction analysis with Bollinger band analysis, the trader can confidently enter or exit the market based on the evidence provided. If the right move is made, the trader could make a lot of profit or avoid losing money during a breakout. Similarly, this strategy can be applied to Fibonacci extensions, as the same principles are used to determine future market movements.