Stocks

Retrace and Projecting Trading Success

BrandonWendell
Brandon Wendell
Instructor, CMT

A few weeks ago I discussed the two price environments in any trend. Last week, when teaching a Forex class at the Online Trading Academy Center in Jakarta, I put the knowledge of trend movement to use with a technical tool that can be used to measure the potential stock price movement in both of those environments.

Fibonacci tools can be used as odds enhancers to help predict stock price movement

To review, the two environments of a trend are the impulse and the correction. The impulses are the price movements of the shorter time frames that move in the direction of the larger time frame trends. Corrections are pullbacks that move counter to the larger timeframe trend and allow the buyers or sellers to regain strength to continue the trend.

Free Trading WorkshopImpulses tend to be powerful, move faster and cover more price than the corresponding corrections. Therefore, if you are looking for a way to make faster, larger profits, you should trade the impulses. A trader can make counter-trend trades on the corrections. However, they must realize that they are accepting greater risk as the profit targets will be smaller and the potential for loss is great if they do not exit their trade before the new impulse begins. As always, greater risk = greater rewards. A trader willing to accept the risks of counter-trend trading in addition to trend trading stands to profit more than the one who only trades the impulse.

The Fibonacci tools that I have written about in the past are helpful to measure the potential sizes of corrections and even impulses.  They are the tools I used for my forex trade earlier and can be an odds enhancer when trading the Online Trading Academy’s Core Strategy of Supply and Demand.

When stock prices in an uptrend hit a supply zone on a smaller timeframe they often enter into a corrective mode.  This is when the Fibonacci Retracement tool is useful.  The Fibonacci Retracement tool measures the size of the impulse and then projects fractions of that impulse in the opposite direction to predict probable end points for the correction.

These end points, when they align with a demand zone, offer a high probability opportunity to reengage the trend.  A trader could enter a new long position there.

Learn what a retracement level is and how it can help you trade profitably

Once the correction is complete, the markets will again impulse.  The Fibonacci Projections, (often called extensions), are helpful in estimating the distance the new impulse will travel before another correction is likely.

The projection measures the length of the preceding impulse and projects certain measurements of it from the correction point.  In the following chart of SPY, the price stalling just below the 100% projection and a weak supply zone would have signaled a good place to lock in some profits in a long trade.

Stock price is the most important factor when planning trades

The same strategies will also work in a downtrend when the impulses are down and corrections are upward.

One key thing to remember is that even though the Fibs will offer probable turning points, they offer many of them.  You should only use these tools as an odds enhancer for your trading and combine them with reading stock price and Supply and Demand for greater success.

This was just a taste of what proper stock price analysis can offer you as a trader.  To learn more about how professional traders analyze the markets and trade successfully, visit your local Online Trading Academy office today!  Until next week, trade safe and trade well!

Brandon Wendell – bwendell@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.