Алексей Боровков – Fibonacci in trading: the mathematics of market movement. A practical guide to using Correction, Expansion, and Fan Lines in the Forex Market (страница 4)
Key principles of working with recovery:
1. The trend is your friend. Always correct against the trend. If there is no trend, there is no point in using a Fibonacci correction.
2. Zone, not line. The price rarely reverses exactly at a level. More often, it is a zone (±5-10 points) around the level where reversal patterns are formed.
3. Confirmation is mandatory! The Fibonacci level is a target. However, you need a trigger to fire. They are:
· Candlestick patterns (Pin Bar, Engulfing, Inside Bar).
· Divergence on the oscillator (RSI, MACD, Stochastic).
· Coincidence with a horizontal support/resistance level.
4. The 50% level is your ally. Do not ignore this psychological level. It often works better than the "classic" Fibo levels.
5. The older the timeframe, the stronger the level. Levels built on a daily (D1) or weekly (W1) chart are much more significant than those on a five-minute (M5) chart.
A typical mistake of beginners:
Applying a grid to the entire chart or to an unimpressive, sideways movement (flat). Fibonacci only works on clearly defined trend impulses. If there is no impulse, the tool loses its meaning.
Practical exercise:
Open a historical chart of any currency pair (for example, EUR/USD) on the H4 timeframe. Find an obvious upward or downward impulse. Apply the correction grid correctly. Track how the price subsequently behaved at these levels. Note at which level the reversal most often occurred.
Summary: Fibonacci retracement levels are your map for navigating the phases of a trend pullback. They do not predict the future, but they point to areas where the laws of probability and mass psychology converge. By learning how to apply them correctly and patiently wait for confirmation in these zones, you will take the first and main step from chaotic trading to meaningful trading. In the next section, we will learn how to set profit targets using Fibonacci Extension levels.
• Fibonacci Extension Levels (Fibonacci Extension)
A tool for determining the targets of the movement after the correction is completed.
If the correction levels answer the question "Where will the retracement end?", then the Fibonacci extensions answer the next, no less important question: "And where can the price go further after the retracement is completed?".
This tool is a logical continuation of the correction grid and is used to determine potential targets (take-profits) when entering a trend trade.
Tool philosophy: Defining targets based on momentum
The idea is that a new momentum movement (after a correction) is often related to the previous momentum through the same "golden" proportions. Knowing the length of the market's first "step" (momentum A→B) and the depth of the "rest" (correction B→C), we can project the possible length of the next "step" (momentum C→D).
How to properly construct an expansion grid?
Three key points are used here. Defining them correctly is the foundation of success.
Three points for construction:
1. Point A (0%): The beginning of the initial trend impulse.
2. Point B (100%): The end of the initial trend impulse (its extremum).
3. Point C (correction): The end of the correction (rebound) against this impulse. It is from this point that we will look forward to the goals.
The sequence of construction:
In any trading terminal, the Fibonacci Extension tool requires the sequential indication of these three points.:
1. Click on A (the bottom of the momentum in an uptrend).
2. Drag to B (the top of the pulse). The correction grid will appear.
3. Click and stretch to C (correction depth). There will be levels above point B (in an uptrend) – these are the expansion goals.
Key expansion levels and their interpretation
After the construction, you will see levels that exceed 100% (point B). The most significant levels are:
· 61.8% (0.618): Conservative target. If the new impulse is weak, it may end here.
· 100.0% (1.000): Classic, minimum target. The new impulse reaches a length equal to the first impulse (A→B). This is a very frequent and important level.
· 127.2% (1.272): Strong target, square root of 1.618.
· 161.8% (1.618): "Golden" target. The main and most powerful target for a strong trend movement. This is often where the entire wave structure ends.
· 261.8% (2.618): Target for exceptionally powerful, extreme movements.
Practical application: Take Profit Strategy
1. You enter a trade on a rebound from the correction level (for example, from 61.8%) in the direction of the main trend.
2. Immediately after entering, you build a grid of extensions at points A, B, and C.
3. Your targets (take profits) are set at key expansion levels:
· First target (TP1): 100% expansion. At this level, you can fix a part of the profit (for example, 50-70% of the position).
· The second target (TP2): 161.8% of the expansion. You can hold the remaining part of the position until this level.
Example for an upward trend:
· A: Minimum at 1.0000.
· B: Maximum at 1.0200 (impulse = 200 points).
· C: Correction ended at 1.0140 (61.8% correction level).
· Calculation: The 161.8% expansion level will be equal to: B + (B – A) * 1.618 = 1.0200 + 0.0200 * 1.618 = 1.0200 + 0.03236 = 1.05236.
Synthesis with correction levels: Warning about a reversal
Expansion levels can serve not only as targets, but also as warning signals. If the price, having reached, for example, the level of 161.8%, demonstrates signs of exhaustion (a strong reversal candlestick formation, divergence), this level may become the beginning of a new, deep correction or even a reversal. Thus, for a trader sitting in a trade, this is a signal to fix the remaining profit, and for a counter-trend trader – a potential entry point.
Important principles of working with extensions:
1. Priority 161.8%: For strong, pronounced trends, the main focus should be on the 1.618 level.
2. Don't look ahead: Don't build extensions until the correction (point C) has been formed and confirmed. Building on the fly is like guessing.
3. Target cluster: The strongest areas are where the Fibonacci extension level coincides with a key horizontal resistance/support level. For example, the 161.8% target is at an important round number or historical high.
4. Use extensions to find exit points, not entry points. Entering a trade at the 161.8% extension level in the hope of a continuation is an extremely risky strategy.
Resume:
Fibonacci extension levels translate the analysis from the "where to enter" plane to the "where to exit with a profit" plane. It is a transaction management and goal setting tool based on the same mathematical harmony. Together, correction and expansion form a complete cycle of analysis: we find an entry point on a pullback and determine reasonable goals for the movement that should follow it. In the next section, we will look at the Fibonacci Fan, a tool that adds dynamic trend lines to our analysis.
• Fibonacci Fan (Fibonacci Fan): Dynamic support/resistance lines that define a trend corridor
The Fibonacci Fan is a unique tool that transforms static horizontal retracement levels into dynamic slanted trend lines. Unlike the retracement grid, which shows "where the price can roll back," the fan helps you understand how the price will move over time within a trend channel.
The essence of the tool: Dynamic support and resistance
If horizontal Fibonacci levels are "floors" in a building, then the fan is inclined support beams that show the speed and angle of trend development. These lines can serve as:
· Dynamic support in an upward trend
· Dynamic resistance in a downward trend
How to correctly build a Fibonacci fan?