Unit_of_Technical_Analysis: Chapter 5: The 50% Retracement:
Unit_of_Technical_Analysis: Chapter 5: The 50% Retracement:
Why they are important, how to analyze and trade them.
(Note: The sole purpose of taking this chapter earlier is because of the existing pattern formed on nifty which is again at 50% level of the range from bottom (29/11/21) to top (13/12/21) formed after that)
Tools used:
1. Fibonacci
2. Moving Average (MA) (36)
Time Frame: Daily
Method:
1. Fibonacci Retracement
2. Bearish/ Bearish Divergence
Cycles within the Cycles:
The entire cycle is from 19/10/21 to 26/11/21, which we are again breaking down
1. Leg 1 (Fibo 1)
Dates: 19/10/21 – 29/10/21: Completion of 1st Leg (Daily Range)
We again start with the same fundamental,
A signal is obtained when we got a Bearish divergence in Daily Chart (depending on the value difference in Divergence of RSI, the fall can be pre-determined)
Formation of range
Chart: Fibonacci (Ref Fibo 1 on the chart)
Dates: 19/10/21 – High (Level 0) 18604.45
29/10/21 – Low (Level 1) 17968.5
We create a range with the above levels (1st Fibonacci (Ref: fibo 1 on chart) with levels marked on Left), here we get a retracement around 0.5 level (18286.5) on 27/10/21 with a high made of 18342.05 and then the market moves down to nearly 1.618 level on 29/10/21 with a low of 17613.1 while 1.618 level is 17575.5.
This completes the 1st leg of Fibonacci and we again wait for a retracement (pullback).
How to trade
If we are positional trader, we can
Trade: Sell (PUT buy for buyers)/ CALL sell for option writers
Buy Level: 0.5 of Fibonacci i.e. 18286.5 with SL as Day High i.e. 18342.05 we can also consider the swing high of 18604 for safe traders as SL.
Sell Level (close of position): around 1.618 level assume here at day end i.e. 17671
Reward: (Gain) 615.15 points
Risk: 60 points or 320 safe traders.
Risk: Reward is 1 : 10
Time period: 3 days (i.e. 205.05 points/day)
SL trailing
At cost after closing below 0.786 level
At 0.786 level after closing below 1.272 level
At 1.618 level close the position
Can re-enter if opens below 1.618 level for 2.618/ 4.236 targets
Some critical points to remember.
We should get 3 consecutive days of Red candles (generally considered as a reversal signal for a downtrend.)
During the reversal pattern (i.e. after the range formation), generally (refer to the elliptical highlighted part of fibo 1 on chart)
1. The last candle is a Gap up opening, which also opens above the 0.5 level,
2. The last candle also moves slightly above the previous day’s top or previous 2-5 days top where the closing or high has been below/ near the 0.5 level.
3. At times a pattern can also be observed where last 4-5 days candle can be seen just closing below the 0.5 level of the range, the last candle takes up the previous candle’s high/ top, moves above the high and then starts moving down (this candle is not necessarily a bearish engulfing candle).
4. The 1st retracement of leg 1 can be upto 0.236 /0.5 level or between the two levels but not beyond 0.5 level. (Ex. 0.6 or 0.786 level cannot be considered as completion of retracement)
5. Exact entry point for trade can be considered on intraday price action again on the same cycle basis, where if required we can take 2-3 entries with small SL but please don’t over trade.
Trail your SL. Idea is to keep maximum profits in your pocket.
If your SL is hit, you can again re-enter as per the next signal and confirmation.
2. Leg 2: Reversal/ Backtesting Leg (Fibo 2)
Dates: 29/10/21 – 15/11/21: Completion of 2nd Leg (Daily Range)
After completion of the 1st leg, there will be a reversal leg, always remember, if the market has to move down further, it will always make a 50% retracement of the range and then move further. (This is again applicable for all time frames.)
The 2nd (daily) leg again starts in the same fundamental pattern (Refer Fibo 2 on the Chart)
Formation of range
Chart: Fibonacci (Fibo 2)
Dates: 29/10/21 – Low (Level 0) 17613.1
2/11/21 – High (Level 1) 18012.25
We create a range with the above levels 2nd Fibonacci (Refer fibo 2 with levels marked at Centre on chart), here we get a retracement around 0.5 level (17812.7) on 3/11/21 with a low made of 17757.95 and then the market moves up to nearly 1.618 level on 15/11/21 with a high of 18210.15 while 1.618 level is 18258.9.
This completes the 2nd leg of Fibonacci and then we wait for further downtrend.
How to trade
(It is generally not recommended to trade this leg, as this is mostly range bound and takes lots of time)
(intraday traders may take call on daily basis as per signals there think are appropriate with small SL of not more than 40 points)
If we are positional trader, we can
Trade: Buy (CALL buy for buyers)/ PUT sell for option writers
Buy Level: 0.5 of Fibonacci i.e. 17812.7 with SL as Day’s Low i.e. 17757.95 we can also consider the swing low of 17613.1 for safe traders.
Sell Level (close of position): around 1.618 level assume here at day end i.e. 18109.45
Reward: Gain 296.75 points
Risk: 54.75 points or 199.6 for safe traders.
Risk: Reward is 1:8
Time period: 8 days (37 points/day)
SL trailing
At cost after closing above 0.786 level
At 0.786 level after closing above 1.272 level
At 1.618 level close the position
Can re-enter if opens above 1.618 level for 2.618/ 4.236 targets
Some critical points to remember.
During the reversal pattern (after the range formation), generally (refer to the elliptical highlighted part on chart)
1. The last candle is a Gap up opening, which also opens above the 0.5 level,
2. The last candle also moves slightly above the previous day’s top or previous 2-5 days top where the closing or high has been below/ near the 0.5 level.
3. At times a pattern can also be observed where last 4-5 days candle can be seen just closing below the 0.5 level of the range, the last candle takes up the previous candle top, moves above that and then starts moving down (this candle is not necessarily a bearish engulfing candle).
4. The 2nd retracement is mostly upto 0.5 level but beyond 0.5 level. (Ex. 0.6 or 0.786 level)
5. Since we know the reversal fibonnacci, we know the approximate levels where the last candle can terminate.
Trail your SL. Idea is to keep maximum profits in your pocket.
If your SL is hit, you can again re-enter as per the next signal and confirmation.
Stop loss eating/ False Breakout:
Many a times, market gives a false breakout around 0.5 levels, takes up the top of previous candles and then starts moving down. (There are numerous such examples)
On 12/11/21 Market gave a strong bullish candle just near 0.5 levels, next day i.e.15/11/21, it created a support (read as low of the day) at 0.5 level and closed above it, also the candle pattern created was evening Star. On 16/11/21, finally Market moved below 0.5 level with a big red candle and continued its downward Journey. (It always very important to watch out for these 50% retracement levels which act as turning point in the market and where maximum chances of loosing money occurs because we are not sure for the direction)
(We may have to try once or twice for a good entry but don’t over trade)
Continuation of downtrend
The downtrend is continued by forming new Lower Highs (LH) and Lower lows (LL), after the formation of 1st and 2nd leg, the 3rd leg is formed which is again an aggressive fall like the 1st leg.
3. Leg 3: downtrend continuation
After completion of 1st leg downtrend and 2nd leg (50% retracement), we see a 3rd leg which is again continuation of the downtrend upto 1.272/ 1.618 levels (or more) of the new range formed.
Note: The completion of the 1st leg is the range for 3rd leg while the 2nd leg is retracement upto 50% for the 3rd leg. This is how the market moves and we have to construct our Fibonacci on the basis of these new range. Remember, the range is important for us and not the candles formed within the range. We generally see aggressive (trending) candles during 1st and 3rd leg and range bound candles during the 2nd leg.
Dates: 15/11/21 – 26/11/21: Completion of 3rd Leg (Daily Range)
The 3rd leg doesn’t follow any fundamentals, and generally follows these steps
1. Movement from 0.5 level towards 1 level, with a pullback or back-testing near 0.786 level
2. Movement from 0.786 level towards 1.272 level, with a pullback or back-testing near 1.0 level
3. Completion of 1.618 or further movement with back testing at 1.618 level.
How to trade
If we are positional trader, we can
Trade: Sell (PUT buy for buyers)/ CALL sell for option writers
Buy Level: 0.5 of Fibonacci i.e. 18108.8 with SL as Day High i.e. 18210.15.
Sell Level (close of position): around 1.618 level assume here at day end i.e. 17026.45
Reward: Gain 1082.35 points
Risk: 102 points.
Risk: Reward is 1:10
Time period: 9 days (120.26 points/day)
SL trailing
At cost after closing below 0.786 level
At 0.786 level after closing below 1.272 level
At 1.618 level close the position
Can re-enter if open below 1.618 level for 2.618/ 4.236 targets
Some critical points to remember.
The 3rd leg is a simple fall without any further signals, with small halts at 0.786, 1, 1.272 levels.
During the 3rd leg
1. The crossover at 0.786, 1 and 1.618 is generally with powerful candles.
2. The pattern may terminate at 1.272/ 1.618 or may go beyond upto 2.618/ 4.236 also. Trend with the trend as we can see small reversals.
Trail your SL. Idea is to keep maximum profits in your pocket.
If your SL is hit, you can again re-enter as per the next signal and confirmation.
Observations:
The price movement during the Bear phase is systematic and moves in 3 phases as described above,
Identification of downtrend trend can be best seen with Bearish divergence and confirmation with price action in the form of Fibonacci Retracement and vive-versa for Bullish Divergence.
For continuation of trend, Price, MA, RSI & MACD are moving is tandem.
It may happen that the completion of 3rd leg may become 1st leg for further downtrend; we need to study the pattern carefully for that along with indicators and price action before taking further trades.
Conclusions:
1. The 1st and 3rd leg are generally very aggressive, while the 2nd leg is more of consolidation.
2. During 2nd leg, if the market takes a support or sustains above 50% level, we should consider this as a reversal for uptrend.
3. Fibonacci retracement can be best used along with RSI & MACD.
4. We can identify signals when small Fibonacci (in 15/30/hourly charts) gives retracement @ 0.236 levels and Short Sell signal for Weekly/ Monthly calls with 50% Fibonacci levels are described above.
5. Reversal patterns can be best identified with Fibonacci when Higher-High-Higher Low patterns are formed.
(Note: The sole purpose of publishing chapter 5 before chapter 3 & 4 is because of the existing pattern formed on nifty which is again at 50% level of the range from bottom (29/11/21) to top (13/12/21) formed after that, readers can gain an idea from the chart pattern and trade wisely)
Refer to Chapter 1 & 2 if you have not read that till now.
Why they are important, how to analyze and trade them.
(Note: The sole purpose of taking this chapter earlier is because of the existing pattern formed on nifty which is again at 50% level of the range from bottom (29/11/21) to top (13/12/21) formed after that)
Tools used:
1. Fibonacci
2. Moving Average (MA) (36)
Time Frame: Daily
Method:
1. Fibonacci Retracement
2. Bearish/ Bearish Divergence
Cycles within the Cycles:
The entire cycle is from 19/10/21 to 26/11/21, which we are again breaking down
1. Leg 1 (Fibo 1)
Dates: 19/10/21 – 29/10/21: Completion of 1st Leg (Daily Range)
We again start with the same fundamental,
A signal is obtained when we got a Bearish divergence in Daily Chart (depending on the value difference in Divergence of RSI, the fall can be pre-determined)
Formation of range
Chart: Fibonacci (Ref Fibo 1 on the chart)
Dates: 19/10/21 – High (Level 0) 18604.45
29/10/21 – Low (Level 1) 17968.5
We create a range with the above levels (1st Fibonacci (Ref: fibo 1 on chart) with levels marked on Left), here we get a retracement around 0.5 level (18286.5) on 27/10/21 with a high made of 18342.05 and then the market moves down to nearly 1.618 level on 29/10/21 with a low of 17613.1 while 1.618 level is 17575.5.
This completes the 1st leg of Fibonacci and we again wait for a retracement (pullback).
How to trade
If we are positional trader, we can
Trade: Sell (PUT buy for buyers)/ CALL sell for option writers
Buy Level: 0.5 of Fibonacci i.e. 18286.5 with SL as Day High i.e. 18342.05 we can also consider the swing high of 18604 for safe traders as SL.
Sell Level (close of position): around 1.618 level assume here at day end i.e. 17671
Reward: (Gain) 615.15 points
Risk: 60 points or 320 safe traders.
Risk: Reward is 1 : 10
Time period: 3 days (i.e. 205.05 points/day)
SL trailing
At cost after closing below 0.786 level
At 0.786 level after closing below 1.272 level
At 1.618 level close the position
Can re-enter if opens below 1.618 level for 2.618/ 4.236 targets
Some critical points to remember.
We should get 3 consecutive days of Red candles (generally considered as a reversal signal for a downtrend.)
During the reversal pattern (i.e. after the range formation), generally (refer to the elliptical highlighted part of fibo 1 on chart)
1. The last candle is a Gap up opening, which also opens above the 0.5 level,
2. The last candle also moves slightly above the previous day’s top or previous 2-5 days top where the closing or high has been below/ near the 0.5 level.
3. At times a pattern can also be observed where last 4-5 days candle can be seen just closing below the 0.5 level of the range, the last candle takes up the previous candle’s high/ top, moves above the high and then starts moving down (this candle is not necessarily a bearish engulfing candle).
4. The 1st retracement of leg 1 can be upto 0.236 /0.5 level or between the two levels but not beyond 0.5 level. (Ex. 0.6 or 0.786 level cannot be considered as completion of retracement)
5. Exact entry point for trade can be considered on intraday price action again on the same cycle basis, where if required we can take 2-3 entries with small SL but please don’t over trade.
Trail your SL. Idea is to keep maximum profits in your pocket.
If your SL is hit, you can again re-enter as per the next signal and confirmation.
2. Leg 2: Reversal/ Backtesting Leg (Fibo 2)
Dates: 29/10/21 – 15/11/21: Completion of 2nd Leg (Daily Range)
After completion of the 1st leg, there will be a reversal leg, always remember, if the market has to move down further, it will always make a 50% retracement of the range and then move further. (This is again applicable for all time frames.)
The 2nd (daily) leg again starts in the same fundamental pattern (Refer Fibo 2 on the Chart)
Formation of range
Chart: Fibonacci (Fibo 2)
Dates: 29/10/21 – Low (Level 0) 17613.1
2/11/21 – High (Level 1) 18012.25
We create a range with the above levels 2nd Fibonacci (Refer fibo 2 with levels marked at Centre on chart), here we get a retracement around 0.5 level (17812.7) on 3/11/21 with a low made of 17757.95 and then the market moves up to nearly 1.618 level on 15/11/21 with a high of 18210.15 while 1.618 level is 18258.9.
This completes the 2nd leg of Fibonacci and then we wait for further downtrend.
How to trade
(It is generally not recommended to trade this leg, as this is mostly range bound and takes lots of time)
(intraday traders may take call on daily basis as per signals there think are appropriate with small SL of not more than 40 points)
If we are positional trader, we can
Trade: Buy (CALL buy for buyers)/ PUT sell for option writers
Buy Level: 0.5 of Fibonacci i.e. 17812.7 with SL as Day’s Low i.e. 17757.95 we can also consider the swing low of 17613.1 for safe traders.
Sell Level (close of position): around 1.618 level assume here at day end i.e. 18109.45
Reward: Gain 296.75 points
Risk: 54.75 points or 199.6 for safe traders.
Risk: Reward is 1:8
Time period: 8 days (37 points/day)
SL trailing
At cost after closing above 0.786 level
At 0.786 level after closing above 1.272 level
At 1.618 level close the position
Can re-enter if opens above 1.618 level for 2.618/ 4.236 targets
Some critical points to remember.
During the reversal pattern (after the range formation), generally (refer to the elliptical highlighted part on chart)
1. The last candle is a Gap up opening, which also opens above the 0.5 level,
2. The last candle also moves slightly above the previous day’s top or previous 2-5 days top where the closing or high has been below/ near the 0.5 level.
3. At times a pattern can also be observed where last 4-5 days candle can be seen just closing below the 0.5 level of the range, the last candle takes up the previous candle top, moves above that and then starts moving down (this candle is not necessarily a bearish engulfing candle).
4. The 2nd retracement is mostly upto 0.5 level but beyond 0.5 level. (Ex. 0.6 or 0.786 level)
5. Since we know the reversal fibonnacci, we know the approximate levels where the last candle can terminate.
Trail your SL. Idea is to keep maximum profits in your pocket.
If your SL is hit, you can again re-enter as per the next signal and confirmation.
Stop loss eating/ False Breakout:
Many a times, market gives a false breakout around 0.5 levels, takes up the top of previous candles and then starts moving down. (There are numerous such examples)
On 12/11/21 Market gave a strong bullish candle just near 0.5 levels, next day i.e.15/11/21, it created a support (read as low of the day) at 0.5 level and closed above it, also the candle pattern created was evening Star. On 16/11/21, finally Market moved below 0.5 level with a big red candle and continued its downward Journey. (It always very important to watch out for these 50% retracement levels which act as turning point in the market and where maximum chances of loosing money occurs because we are not sure for the direction)
(We may have to try once or twice for a good entry but don’t over trade)
Continuation of downtrend
The downtrend is continued by forming new Lower Highs (LH) and Lower lows (LL), after the formation of 1st and 2nd leg, the 3rd leg is formed which is again an aggressive fall like the 1st leg.
3. Leg 3: downtrend continuation
After completion of 1st leg downtrend and 2nd leg (50% retracement), we see a 3rd leg which is again continuation of the downtrend upto 1.272/ 1.618 levels (or more) of the new range formed.
Note: The completion of the 1st leg is the range for 3rd leg while the 2nd leg is retracement upto 50% for the 3rd leg. This is how the market moves and we have to construct our Fibonacci on the basis of these new range. Remember, the range is important for us and not the candles formed within the range. We generally see aggressive (trending) candles during 1st and 3rd leg and range bound candles during the 2nd leg.
Dates: 15/11/21 – 26/11/21: Completion of 3rd Leg (Daily Range)
The 3rd leg doesn’t follow any fundamentals, and generally follows these steps
1. Movement from 0.5 level towards 1 level, with a pullback or back-testing near 0.786 level
2. Movement from 0.786 level towards 1.272 level, with a pullback or back-testing near 1.0 level
3. Completion of 1.618 or further movement with back testing at 1.618 level.
How to trade
If we are positional trader, we can
Trade: Sell (PUT buy for buyers)/ CALL sell for option writers
Buy Level: 0.5 of Fibonacci i.e. 18108.8 with SL as Day High i.e. 18210.15.
Sell Level (close of position): around 1.618 level assume here at day end i.e. 17026.45
Reward: Gain 1082.35 points
Risk: 102 points.
Risk: Reward is 1:10
Time period: 9 days (120.26 points/day)
SL trailing
At cost after closing below 0.786 level
At 0.786 level after closing below 1.272 level
At 1.618 level close the position
Can re-enter if open below 1.618 level for 2.618/ 4.236 targets
Some critical points to remember.
The 3rd leg is a simple fall without any further signals, with small halts at 0.786, 1, 1.272 levels.
During the 3rd leg
1. The crossover at 0.786, 1 and 1.618 is generally with powerful candles.
2. The pattern may terminate at 1.272/ 1.618 or may go beyond upto 2.618/ 4.236 also. Trend with the trend as we can see small reversals.
Trail your SL. Idea is to keep maximum profits in your pocket.
If your SL is hit, you can again re-enter as per the next signal and confirmation.
Observations:
The price movement during the Bear phase is systematic and moves in 3 phases as described above,
Identification of downtrend trend can be best seen with Bearish divergence and confirmation with price action in the form of Fibonacci Retracement and vive-versa for Bullish Divergence.
For continuation of trend, Price, MA, RSI & MACD are moving is tandem.
It may happen that the completion of 3rd leg may become 1st leg for further downtrend; we need to study the pattern carefully for that along with indicators and price action before taking further trades.
Conclusions:
1. The 1st and 3rd leg are generally very aggressive, while the 2nd leg is more of consolidation.
2. During 2nd leg, if the market takes a support or sustains above 50% level, we should consider this as a reversal for uptrend.
3. Fibonacci retracement can be best used along with RSI & MACD.
4. We can identify signals when small Fibonacci (in 15/30/hourly charts) gives retracement @ 0.236 levels and Short Sell signal for Weekly/ Monthly calls with 50% Fibonacci levels are described above.
5. Reversal patterns can be best identified with Fibonacci when Higher-High-Higher Low patterns are formed.
(Note: The sole purpose of publishing chapter 5 before chapter 3 & 4 is because of the existing pattern formed on nifty which is again at 50% level of the range from bottom (29/11/21) to top (13/12/21) formed after that, readers can gain an idea from the chart pattern and trade wisely)
Refer to Chapter 1 & 2 if you have not read that till now.
It may happen that the completion of 3rd leg may become 1st leg for further downtrend; we need to study the pattern carefully for that along with indicators and price action before taking further trades.
with Level 0: 18604.45 & level 1: 16782.4 (Low of 26th November)
50% retracement was at 17693.45
today's candle was piercing candle at Level 1 (Refer Leg 3 details above)
T1: 1.272: 16286
T2: 1.618: 15656.4