So far you have understood what are the types of Candlesticks and how the Candlestick Patterns tells you the sentiment of the market. Today we will learn about the Fibonacci Series to find out the right entry and exit from the market.
Stock Market never goes up in the straightforward and never goes down in similar way. It was moves in a Zig-Zag motion. There are three distinct phase of the market which is necessary to be understood to trade wisely in the market.
- Accumulation Phase
- Mark-Up Phase
- Distribution Phase
1. Accumulation Phase
Accumulation Phase happens right after the steep sell off in the market. It doesn’t matter whether the stock is fundamentally strong or not. It just happens with all the stock when index is dropping. The stock prices would have plummeted to rock bottom valuations, but the buyers would still be hesitant of buying fearing there could be another sell off. And this is the time when SMART MONEY comes into the market. Giant Stock Traders or Institutional Buyer put their money in the market. This is called Accumulation and this time period is called Accumulation Phase for the stock.
2. Mark-Up Phase
When Institutional Buyer are buying available stocks from the market, stock prices starts going up and retail traders sense the support for the stock. Sometimes it coincide with positive news about the stock. Hence, the sentiment becomes positive about the stock and stock prices starts growing. This is called Mark-Up Phase of the stock.
3. Distribution Phase
Distribution Phase happens right after Mark-Up Phase. This is the time when Institution buyers starts getting out from the market as they have entered in early stage and now they want to book their profit. However, retail traders think that the price is going up because the price of the stock was growing from past several days. Thus, they got trapped and when retail traders enters in the market, stock price takes the U-Turn and price start falling down.
This is a genuine and common problem to all retail or small traders on D-Street. But trust me, Fibonacci Retracement is a brilliant way to find the right entry and exit from the market and stay away from traps.
The Fibonacci series is a sequence of numbers starting from zero arranged in such a way that the value of any number in the series is the sum of the previous two numbers.
The Fibonacci sequence is as follows:
0 , 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 …
0+1 = 1
1+1 = 2
2+3 = 5
I) When you divide a number by the next numbers in the series.
34/55 = .618
55/89 = .618
89/144 = .618
When we convert this into percentage it is 61.8% which is very useful and important retracement level of the stock.
II) When you divide a number by the numbers placed two space ahead in the series.
13/34 = .38
21/55 = .38
34/89 = .38
When we convert this into percentage it is 38% and it first level of retracement.
How to Find Important Retracement Levels
Now lets see the relevance of this into stock market.
In your trading platform find the steep gain or fall in the price. Add Fibonacci Retracement at the start of the price gain till the end of the price rise. 100% of the Fibonacci series should be at the bottom if you want to find the support level else set 100% at the top of the price when stock price is falling in order to find the resistance level of the stock.
Stock in Discussion : NESTLEIND
The above chart is of Nestle Limited from 8 Feb’18 to 4 Oct’18. Nestle has respected the Fibonacci Series pretty well. Price raised from INR 6897 to INR 11708. This stock has retraced at 50% of Fibonacci Series which is a second level of retracement.
11708-6897 = 4811 ( Recent High Price – Recent Low Price )
4811*50% = 2405 ( Retracement Level at 38.2% or 50% or 61.8%. This time it is 50% )
11708-2405 = 9302 ( High price – Retracement Price)
Let’s look the next stage of the same stock from here. Because, the price has again reached to INR 11776 from INR 9302. So how we can find the next support level or correction level of the stock.
So as you can see in the above image, this is again Nestle Limited with future dates this time. We know that stock have re-traced its price by 50% and now returning back to its journey to the upside. It went from INR 9064 (Lowest Low of the Bull Run) to INR 11776 (Highest High of the Bull Run). Now what would be the next level of correction. Let’s see.
First we check if the Stock corrects its price by 50%
11776 – 9064 = 2712
2712*50% = 1356
11776 – 1356 = 10420
What if Stock corrects its price by 60%
11776 – 9064 = 2712
2712*60% = 1627
11776-1627 = 10149
And as per the Image above, stock has corrected its price by 60% of the Fibonacci Series, and went to INR 10101. So this was the right time to make an entry in the stock. And after this level of correction you can see the today’s price (when I am writing this Blog on 28 May’19) is INR 11145.
11145 – 10101 = 1044
1044 / 10101 = 10.33% Gain
10% gain within 14 days and that too is two times. 1st from 8 Mar’19 to 29 Mar’19 and 2nd from 14 May’19 to 28 May’19. Which means you could have earned 20% of your value by investing your money for 30 days only.
However, nobody is so perfect and never in case of stock market to find the exact top and bottom of any run. But still you can earn a handsome return on your investment if trade sensibly in the market.
I hope you have found this interesting and this would really help you in your journey in D-Street. Technical Analysis is easy to learn if you invest some time and energy. It is really worth and necessary if you want to gain something from Stock Market. Else, 90% people in the market losses their hard earned money with their speculative ideas and call market is a gambling. You can read all the blogs on Technical Analysis like Stock Trading Basic Stock Movement, Charts and Introduction to Candlesticks Candlestick Patterns Types of Candlesticks and you will understand the complete trading strategies for stock market.
Now after reading all this, you must read 4 Key Indicator Strategy which is a proven formula and even I use the same to trade my stocks. I hope that you will also be benefited with this technique.