How to Find Positional Targets Using Fibonacci
We sometimes find it hard to find targets for our positional trades or failed to take positional trades at right time. To overcome such issues, we will use fibonacci tool to find right entry points and exit points.
This concept is based on simple wave concept which comprises of impulsive wave and corrective where corrective wave retraces back to 50% of its impulsive wave. Please, keep in mind that, we are going into depth of wave concept as it will then bring out vast topic of Elliot Waves. So, we will try to keep it simple and we will just find any impulsive wave and corrective wave. To understand what are these, refer the figure below;
Figure 1: Impusive & Corrective Wave
So, as we can see, everytime stock bounces back after the retracement, but how far it may go? or how far it may come down when the retracement will start? These can be found out using fibonacci tool. Generally, in corrective wave stock retraces back to 50% fibonacci level of its impulsive wave. So we just need to find out the impulsive wave and corrective waves and find our entry points at 50% Fibonacci Level. However, sometimes one might notice that after a big impulsive wave there are 3 corrective waves which follows it as shown in figure below, so if one doesn’t know about Elliot wave concept, it will be difficult to predict if current corrective is going to be 3 wave correction or 1 wave correction.
Figure 2: Impulsive & Corrective Wave
As one can see in above figure, after a big impulsive move, stock retraces back till point C. Whether retracement is like figure 1 or figure 2, we should always look for retracement till atleast 50% Fibo level. This strategy which is being explained here will work great only if above conditions are met. Lets know how to do it along with examples.
Step 1: If you find any impulsive move (higher high candles which makes new high in short time) and its retracement, Apply Fibonacci on it to find what will be its 50% retracement, if scrip has not retraced to 50%, or if already retraced then mark it as confirmation of next up move if there is some good solid reversal candlestick pattern.
For example in below chart of CENTURYTEX, it is moving in the form of waves as explained above.
Now, we will apply Fibonacci on previous impulsive move to check if the correction was 50% retracement or not.
So we applied fibonacci on recent impulsive move and we found that the script has retraced back to atleast 50% level and there is dojo/spin like candle formation at that level which gives us the sign for an entry into this trade.
Now, to know the target for our trade we will use Trend Based Fibonacci tool which requires 3 points, Point A which is Swing low of impulsive wave and Point B Swing High of Impusive Wave and Point C is Low of the Corrective wave.
As you can see, we have applied trend based Fibonacci tool and we got the targets. Most of the times, target is going to 61% Fibo level but we will advice you to start moving SL once scrip crosses 50% level as market moves are unpredictable or if you are good at Support & Resistance reading, you easily find which target is going to be hit.
The selection of impulsive move depends upon your own analysis as how you are looking into the chart, the impulsive move can be of much larger period if you are looking for some mid-term gains and targets can also vary based on your selection of swing high & low alongwith correction wave. However, always make sure that the stock has atleast retraced back to 50%. To know the advantage of this strategy, we recommend you to apply it on stocks such as TATACHEM, RECLTD and ADANIPORTS. Try to find their impulsive and corrective waves.
Again, we would like to emphasize that, keep it simple alongwith wave predictions and for advance learning read about Elliot Waves and how to predict them.