How to flexibly use the golden section line in trading?
The golden ratio is an indicator used for retracements in trading, serving as support and resistance levels during pullbacks, such as the 38.2%, 50%, and 61.8% retracement levels, which all play roles in providing support and exerting pressure.
Today, I will first explain the basic knowledge of the golden ratio and then discuss the technical methods for its use.
What is the golden section line?
The golden ratio, simply understood, is the division of an object into two parts, such as 1:0.618, which is recognized as the most aesthetically pleasing proportion.
In trading, we also often use the golden ratio. For example, after a trend is established, when the pullback reaches 61.8%, it is considered the limit of the trend's retraction; otherwise, the trend will reverse.
With the development of technical analysis, the 38.2%, 50% levels have also gradually been used as support for retracements. Additionally, some aggressive traders use parameters of 23.6% and 76.4% in the golden ratio.
The prices at which a trend retraces by 23.6%, 38.2%, 50%, and 61.8%, as well as 76.4%, have the effect of support and pressure. Drawing support or resistance lines at these prices forms the golden section lines.
Traders need to select the high and low points of a wave and manually draw the golden section lines on the candlestick chart. I will use an image to demonstrate this.
The chart shows a 1-hour candlestick chart of crude oil. The market started to decline from 80.5 and began to retrace at 77.4. When the retrace reached the 38.2% level, a reversal candlestick pattern formed, and the market continued to decline.
Note the blue circular markers for the highs and lows in the chart, which traders need to identify. After finding the high and low points, connect them to form the golden section lines.The support and resistance effects of the golden section ratio.
Almost all trend theories understand the trend as a wave-like movement, and the most basic trend is the rise and fall, or the fall and rise. The following picture is a schematic diagram of such a trend.
The chart is a 15-minute K-line chart of crude oil, with the left side showing a bullish trend of rise and fall and rise, and the right side showing a bearish trend of fall and rise and fall.
Observe the red arrows in the chart, which look like the letter "N". The core of this N-shaped trading is the second stroke of the N shape, that is, the correction trend. If you can find the technical point where the correction ends, buy or sell, you can use a very small stop loss to catch the third wave of the trend, which is the third stroke of the N shape.
The basic structure of the trend and the correction function of the golden section ratio are perfectly combined. When the trend corrects, use the golden section ratio as support or resistance. After the correction is in place, observe the price changes or technical patterns. If a stop reversal signal appears, you can try to open a position.
The chart is a K-line chart of spot gold.
After the first wave of the trend starts, it corrects and tests the 50% level, then forms a reversal K-line pattern. At this time, there is a signal that the trend is about to stop and reverse, and you can try to go long. Aggressive stop losses can be placed directly below the reversal K-line, and finally, the trend rises significantly.
Regarding K-line patterns, I emphasize that the K-line that confirms the reversal must be a large K-line, so that the meaning of the reversal is stronger.
Of course, it is not necessary to enter the market with a K-line reversal here, and you can also use the logic of looking big and doing small.
The chart above the trend chart is the same section, but it has been switched to a 5-minute K-line chart.After testing the support at 2329 in the chart, the level showed an upward golden cross signal, which indicates that one can open a long position, with a stop loss set at the 5-minute low. Subsequently, the market rose.
In summary: The support level of the Fibonacci retracement + a bullish signal appearing on the 5-minute chart indicates the opening of a long position.
Regarding the use of the Fibonacci retracement, there is a point to note that I would like to elaborate on.
The Fibonacci retracement is a good indicator, but its biggest issue is that the starting and ending points for drawing the Fibonacci lines need to be determined by traders based on their experience. This requires a higher level of experience and technical skills, making it less suitable for new traders with insufficient trading experience.
Before using the Fibonacci retracement, it is essential to practice backtesting extensively.