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Wednesday, June 28, 2017

Fibonacci Retracement

Today I'm gonna discuss about "What normally happened when there is big news in the market".

Let's say there is an announcement from the Fed that they will increase interest rate then suddenly BOOM.... 

Forex Market went crazy!! Either it's going up or it's going down.

And guess what I normally do during that moment?


Yup, that's right. When the market went crazy, it is quite risky for me to enter the market and make any open position. What I normally do is to wait until some time, until I figure out what are the extreme values.

Yes…. Extreme Values determine everything here.

Now I’m gonna be talking about one of the methods I like to use after big announcement happened in the market.

It’s called Fibonacci Retracement.

This is one of the methods that I often use to find an opportunity to enter the market after there is big news announced.

Now, let's take a look at the following EUR/GBP chart. Please focus on the yellow zone. This what happened on 28 June 2017.

On that picture, in that specific period of time (which is 28 June 2017), you will find two extreme values (highest and lowest values). And as per chart, those are 0.88797 and 0.87716.

What you're gonna do next is to draw Fibonacci Retracement Levels. 

If you are using Metatrader, on the software, click on Insert>Fibonacci>Retracement

Then hover your mouse to the first extreme level. In this case, the first extreme level is the highest level which was 0.88797. Click on that point and drag your mouse to the second extreme level which was 0.87716. Please notice, always draw from the first extreme level to the second extreme level. If the market price is going up, that means you're gonna have to draw from the lowest value (first extreme level) to the highest value (second extreme level). 

Anyway, back to the chart. After drawing your Fibonacci Retracement Levels. You will get something like this: 

So what the hell do all those new lines do?

Those lines are your Support and Resistance Levels which will help you to get an idea of the price movement. If you notice, there is a tendency for the last three candlesticks to be stopped at around 0.87970. Whenever EUR/GBP tried to go down, the market seemed like trying to hold the pair to keep moving above the level. That is 23.6 level of Fibonacci Retracement Level. In this case, it's acting as a Support Level.

All of the Fibonacci Retracement Levels located below current market price is considered to be Support Levels and vice versa, all of the Fibonacci Retracement Levels located above the current market price are considered to Resistance Levels.

In this case:
Support Levels: 0 and 23.6 Fibonacci Retracement Levels
Resistance Levels: 38.2; 50; 61.8; and 100.0 Fibonacci Retracement Levels

Make sense, so far?

So the next questions would be, what am I supposed to do with all of these Levels?

Well, the idea of using Fibonacci Retracement Level is to help you to find an opportunity to open a position and to place your stop loss and your profit limit.

If you have Long Position (BUY) then you're gonna want to put your stop loss below Support Level and put your profit limit below your Resistance Level.

Vice versa, if you have Short Position (SELL) then you're gonna want to put your stop loss above Resistance Level and put your profit limit above your Support Level.