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I'm a little confused as to how this works. Graph

The graph above is examining a downward retracement in a long, upward trend. The recommended point to place your stop loss is apparently at the level below the fibonacci indicator that the support level appears to be at.

Does this mean that you shouldn't hold onto an asset after you've bought it thinking the price will rise after the downward retracement (therefore avoiding loss) if the price goes below the fibonnaci level that you believe a support point lies?

For Example, if the price falls to the 50.00% line and is followed buy a green, large-bodied candlestick that indicates a swing up (giving reason to believe the price will rise and you should buy) and you buy in, then if the price unexpectedly turns downward towards the stop loss level indicated you should sell once the price hits the stop loss and avoid any further loss in case the price falls even further down from the stop loss?

graph

And in the case above, where an upward retracement is present in a long-term downward trend, is the stop loss placed just above the fibonacci level that a support level is believed to be because you would want to sell what you would have bought at the beginning of the positive retracement when it seems to be pushing upwards out of the 50% resistance point to a point where the price is extremely likely to crash since you're in a long-term downward trend?

In this case, is the reason why you wouldn't hold the asset to then realize more gains (if it breaks through the 50% resistance point) because you're in a long-term downward trend and therefore it isn't probable the price would push past the 50% point?

Thank you for any help

Bradley
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  • The Fibonacci sequence is just a particular example of a geometric sequence (where each value is (1+sqrt(5))/2 times greater than the previous value). I think the reasoning is related to modeling stock prices using an exponential distribution (whose CDF bears a resemblance to a geometric sequence), which can be interpreted as saying that stock prices will tend to fluctuate around a single value, but can occasionally shift up or down by a significant amount with a low probability. The low probability means that it is even less likely for such a shift to be immediately reversed.... – chepner Jun 16 '21 at 15:00
  • ... implying that once you've locked in a gain, you can "detect" a later downward shift by noting a sustained decrease in price before it wipes out your gain. Of course, this all depends on stock prices being a random process, not something driven by actual market forces. – chepner Jun 16 '21 at 15:01
  • @chepner , as I understand it the OP is just trying to understand why you put a stop under the (supposed) end of a run. (the fact that the mysticism involved is "fibonacci candlesticks" or whatever does not seem to be the question at hand) – Fattie Jun 16 '21 at 16:25
  • With your second example, you are actually taking a short trade (selling to open the trade) so you would then put your stop loss where you would buy to close the trade. – Victor Jun 17 '21 at 02:09

1 Answers1

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You are wholly overthinking concepts like "fibonacci" trading and "candlestick" trading.

Be aware that 50% (perhaps much more than that) of traders think these notions are equivalent to trading based on horoscopes - ie, utterly ridiculous.

Your question would be like coming on here and asking a detailed question about some aspect of horoscope trading.

For this reason when there's a specific "how do I trade this chart concept" question on here, it's usually just said "it would be best to ask that question on one of the many fibonacci/whatever discussion boards"

That being said in answer to your question, wherever you got that "tutorial" from, "Does this mean that you shouldn't hold onto an asset after you've bought it thinking the price will rise after a downward leg if the price goes below where you believe a support point lies?" sure, obviously, that's the idea.

The price is at 100. It is heading down. For whatever reason (you believe in horoscopes, prime numbers, even-numbers trading theory, analysis of oil prices and interest rates - whatever) you believe it will not fall below say 50. Hence, if it hits 49, your trading idea was wrong, you sell immediately and you (as one usually does with trades) simply take the loss and say "I will put that one in my trades-I-lost column".

Sure, that's the idea.

Regarding your second question, it's too complicated to understand, and, it's totally unclear whether the theoretical trade was long, short or whatever. But the same principle applies, in this sort of trading idea.

For example very simply ... you buy something at 100 thinking it will go up. But. At the same time you decide "if it touches 90, my trading idea was wrong, I will take the loss and move on to the next one" so you at the same time put in some sort of stop at 90.

Don't forget "trading" is like baseball hitting, if you see yourself trying your hand at "day trading", the very best just do a small percentage over .500 you know?

Fattie
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  • While I'd prefer to arbitrarily use prime numbers as a basis for guessing what stock price will do, the idea of using ROYGBIV kind of appeals to me ;>). While the very best don't do much over .500 (or even less), their risk management is the difference. – Bob Baerker Jun 16 '21 at 16:12
  • funny thing ... when i was a kid i believe they taught VIBGYOR !!! – Fattie Jun 16 '21 at 16:26
  • yes i've tried to tell people "first get REALLY GOOD at money management playing BJ or roulette at a casino". but, i've completely given up trying to tell people :/ – Fattie Jun 16 '21 at 16:27
  • VIBGYOR? Did you attend the Financial School of Dyslexia? When noobs ask me about trading, I always recommend that they try to first trade without losing much. Then worry about making money. – Bob Baerker Jun 16 '21 at 16:35
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    (-1 for the answer) I think the original question was starting with Fibonacci retracements or extensions as a basis for support/resistance, so its not a reasonable answer to compare to horoscopes, as this is not a reasonable answer to the question. Fibonacci is used by many stock market traders who use it as a trading method qualifying it by back testing. See tools like VectorVest, IncredibleCharts that have the power built in to create these types of quite complex back testing – Marcus D Jun 22 '21 at 18:55
  • @BobBaerker "... the idea of using ROYGBIV kind of appeals to me ..." — Could you explain how rainbow colors are relevant to trading? – Flux Sep 01 '21 at 14:49
  • Flux - I was just being snarky. ROYGBIV has no relevance to trading. – Bob Baerker Sep 05 '21 at 21:25