First and the most important thing about trading stock is confident. The second most important things is not be greedy and know your exit point. The third most important things is to set a stop loss and limit sell.
Little bit background about Technical Trading
First lets define the definition of trading vs investing. The following definition is from a book call “The Foundation of Trading” by Howard Bandy. A “trade” is a use of funds to acquire some asset that will be sold at some point in the trader’s lifetime. A “investment” is a use of funds to acquire some asset, often a tangible asset such as real estate. That will not be sold during the investor’s life time. Beside “trade”and “investment”, there is a third category call “expense” which depend on the type of purchase can sometime become a investment or a trade. A car can be consider a expense since the expected value of a car is decreasing over time. People who actively engage in buying and selling of asset is trader and the goal of all trader is make a profit. In a modern day economy, many people believe that the market is perfectly efficient that no trader can make a profit from trading. This idea is also being call the “Efficient Market Hypothesis”. But the “Efficient Market Hypothesis” is not perfectly efficient as Warren Buffet said” I’d be a bum in the street with a tin cup if the market were always efficient.” For our trader, this first thing we need to realize there is inefficiency in the market and those inefficiency equal to opportunists for profit.
Fibonacci retracement is a frequently use tool for traders and is based on the mathematical concept develop by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci retracement is different compare to Fibonacci’s sequence in mathematical as Fibonacci retracement is a way to breakdown and understand stock chat and Fibonacci sequence is a mathematical sequence.
In technical analysis, Fibonacci retracement is created by taking two extreme points, a peak and a trough, on a stock chart and dividing the vertical distance by the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Those number indicate support and resistance level. For example, A stock chat was subdivided by Fibonacci retracement ratio into 23.6%, 38.2%, 50%, 61.8%. If the price of the stock is heading toward, when the price target go pass the 50%, the next supporting level will be the 38.2% and if the toward momentum is so strong to push the price pass through the 38.2%, the next supporting level should be expected around 23.6% mark. The up trend analysis is in a similar manner, but instead consider the each Fibonacci level as support level, we consider them as resistance level and the resistance level will going up as the stock going up. Also, Fibonacci retracement is draw from past historical prices and dependent on the duration of investment, the ratio drawn can be draw on different time scale. Now, let’s take a long on a Fibonacci retracement projected onto a stock chat:
The graph above is a example of applying Fibonacci retracement onto a stock chat. as we can see, the retracement was draw from one price extreme to another price extreme. The stock price have a strong down trend momentum, when the momentum break the 23.6% line, the 38.2% become the next support level. The price consolidate on the 38.2% range for a short while then continues to break till the 50% level and finally stabilize on this level.