Trading Techniques  |  NOV 1997

V.15:11 (477-482) Using Fibonacci Ratios and Momentum by Thom Hartle

Don't buy it here, but wait for a pullback. Are you familiar with that piece of sage advice? Or what about ""I would wait and sell on a bounce""? What does this really mean? Where and when do you act? Here's one technique for calculating retracement levels using that tried-and-true favorite Fibonacci ratios, as well as using momentum to define the trend. Markets trend in a zigzag manner: rallying, leveling off, and surging again, only to be hit by a wave of profit-taking before settling into a trading range, awaiting the next reason to advance or retreat. This activity carries on in the general direction of the trend, easily seen on a price chart. Technically, the trend should be considered up as long as the market unfolds with a series of higher lows and higher highs. Similarly, the trend is considered down if the price action is a series of lower lows, with lower highs before each new low. A market is considered not to be in a trend if the price movement manifests itself in a series of fits and starts or if it fails to sustain levels beyond the previous extreme points, often reversing and forming the range. During an uptrend, good traders will buy the pull-backs, positioning themselves with the trend, taking advantage of the market’s tendency to ebb and flow. When the market is in a downtrend, however, the strategy is to sell rallies, awaiting for the downtrend to resume.

by Thom Hartle