The general idea behind the Fibonacci price retracement tool is to measure momentum and segment it into proportions or ratios. So if we have a momentum, consolidation, continuation pattern what we're looking for is a proportionate continuation. If we have momentum and are looking for a measured move after consolidation we would look for AT LEAST half of the original momentum move for our first target. Speed of achieving our 50% target and rejection or acceptance of this move can help gauge an expectation of a further extension, where we then look for a 1:1 target or 100% extension, or a "measured move".
So, with that said, here are some examples of the above explanation which took place today.
The SPY triangulated for most of the day before breaking out
When price finally did break out you can measure the initial momentum (in this case I used the breakout bar) to get extensions beyond this price range:
In the above chart the 50% and 100% were achieved quickly, while the 150% extension took a steeper retracement before extending further.
Here's another example using a trade I actually took today in CREE. The Fib.s were based on the momentum prior to a basing consolidation pattern, with the expectation of a measured move beyond $64.20. The two blue arrows were exits taken, but I set them slightly under the actual price target.
Taking half off at 50% could at least increase the probability that we'll get filled on something, just in case our Fib. measurements were off ;)
The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at email@example.com
I am always open to questions, comments, or suggestions on how to improve this blog.