Chapter 9

Fibonacci Retracements: The Hybrid Tool

Defining trends. Anticipating trends. Attacking currency trends. Trends. Trends. Trends and then nontrends, but nontrends transition into . . . yes, trends. Trends are great, but I often get a lot of questions from retail traders about the painful corrections—those times when the market reverses the trend and corrects 100, 200, 300 pips, or even more.

We all know that the market's price action does not go up (or down) in a straight line, but in steps. Two or three steps up and one step down. When the steps correct, they can be the killer moves that get traders out of synch with the market. Traders need the most help during these corrective moves. When the market is trending and a trader is on the trend, fear should be reduced. Profits are accumulating, the trend is directional. Trading is about targeting the next levels that keep the trend moving in the direction and managing the profit—not managing a loss.

The fear starts to surface when the trend starts to correct. All of a sudden the profits are being depleted and there is uncertainty as to how far the correction can go. How can fear be controlled during these times?

Tools like moving averages (MAs) and trend lines are in place to flash the warning signs of a potential correction. If the price is trending higher and the price moves below the 100 bar MA on the five-minute chart, the short-term bias turns negative, and the uptrend has a chink in its armor. If the price moves below ...

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