Trading 50% Fib Retracements with Price Action Confirmation
The process of trading the 50% retracement is simple, below is one example of a recent trade on AUDUSD pair.
1. When you have a price action signal present on the daily chart, you then match up the fib 50% retracement level if there is one present (see chart example below), if the price action candlestick signal matches up with the 50% swing retracement level then your good to go and potentially have a valid trade. If you can also find a relevant horizontal level to match up here, its a double whammy of confluence (a reason to get excited).
2. After finding the potential trade signal, decide to enter at market prices, or wait for a pull back to get your stop loss tighter to reduce overall risk. In the chart example below, given the perfection of the setup, as prices started to move up in the correct direction, a long entry could have been taken, momentum in the correct direction is always a good sign.
3. These setups are rare, but still something to look for in your daily chart time frames. I personally feel that when a trader looks for the price action signal first, then matches up the supporting factors they tend to make better trades. What I am saying here is this… if you see a giant signal on the daily chart, find out what other factors are back it up and showing supportive evidence, we wont always be able to trade a signal, mainly because we prefer not to fight the natural trend of the market, and many times we see signals forming against the trend.
4. The 50% swing retracement line and price action signal both came together at one common point and showed us a nice setup here, but what you should really take away from this example is that it was in line with the general thrust of the market, notice that prior to the pull back, we saw a nice rally up, and the pull back did not exceed the 50% area , rather it rejected it strongly and has now bounced aggressively higher to the new recent highs.
Another picture example on AUDJPY 😉
I really hope this article clears some confusion about Fibonacci levels, personally I only get a handful of these setups every month on the daily charts, but when you see these swing retracements inside general trend movement, its wise to mark them on your charts and then look for some confirmation. You can setup on longer time frame and get signal on smallest time frame using this fibonacci retracement strategy. You might read another arcticle about supply demand trading strategies and combined it with candlestick reversal patterns too.