Fifty Percent Retracement - Fibonacci Trading Level
Fifty Percent Retracement Definition
A large number of traders, especially day traders utilize fibonacci levels when trading. The most common fibonacci levels are 23.6%, 38.2%, 50%, 61.8% and 100%. These levels will often prove to be support or resistance, which provide the springboard for a security to continue in the direction of the primary trend. The fibonacci level that has received the most notoriety is the 61.8% retracement level. While there are a number of levels and fibonacci extensions known by professional traders, the fifty percent retracement level is known by virtually every trader. It is a natural trading intuition to buy a stock when it retraces half of its previous move. This basic trading principle is found in many trend following trading styles and it is also the staple of the Wyckoff trading method. This article will focus on long positions, but the same principles can be applied to shorting.
Identifying Reliable Fifty Percent Retracement Levels
Traders will often look for a fifty percent retracement of any move and think that it is a great buying opportunity. Well if it were this easy, every trader would be a millionaire. There are a number of factors that go into identifying when a fifty percent retracement level has better than average shot of providing the necessary support to keep the trend intact. Below are a few basic tenets for identifying such support.
Range of Recent Swing Points
The most recent swing high and swing lows must have a significant distance between them. This will ensure that you are not getting into a choppy trend, where price will penetrate any and every fibonacci level. This also provides you with a safety net that when the security resumes the primary trend, there is ample room between the 50% and 61.8% retracement levels. Also, even if the security is only able to double top, it will ensure a hefty gain.
Decreased Volume on test of Fifty Percent Retracement Level
When the security is pulling back to the fifty percent retracment level, the volume should begin to drop off. This implies that the selling pressure has subsided and that the primary trend is ready to resume. Many traders want to buy the test of the 61.8% retracement, but stocks that are able to hold their 50% retracement level are more bullish as the security had a smaller retracement.
Identify other Areas of Support
The 50% retracement level has even more significance when it coincides with another form of support. These forms of support can come in the form of trendlines, gaps, or previous resistance. The confluence of multiple support levels increases the odds that the security will resume its primary trend.
Fifty Percent Retracement Chart Example
The below charting example is from Lehman Brothers Holdings (LEH). When Lehman tested the 50% retracement, it also tested a previous gap area, which provided additional support. Notice how the stock gapped higher after the successful test of the fifty percent retracement level.