Hello, my friend, and welcome to this post on Fibonacci Retracement. In the first week of the new year, we’ll be discussing why Fibonacci Retracement levels are NOT the most logical place to take your entries, and exits for day trading or swing trading stocks, Forex or futures.
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Fibonacci Retracement – Video
Hey friends, Barry Burns here. Today, I’m discussing an alternative to Fibonacci retracements for analyzing retracement levels in trading—whether you’re into day trading, swing trading, Forex, stocks, or futures. While Fibonacci retracements are widely used, I’d like to introduce a method inspired by the legendary trader W.D. Gann. This isn’t something to use alongside Fibonacci retracements but as a potential replacement. You can experiment and decide which approach works best for you.
W.D. Gann, one of the most famous traders in history, didn’t use Fibonacci retracements. Instead, he relied on a similar yet distinct set of levels. Let me show you how to set this up. Start by drawing a Fibonacci retracement on your chart, as you normally would. Then, manually adjust the levels to match Gann’s method. I’ve already configured my chart, but here’s a breakdown of Gann’s key levels as outlined in his book 45 Years in Wall Street.
Adjusted Fibonacci Retracement Levels
Gann prioritized the following retracement levels:
- 50%: For Gann, this was the most important retracement level. It’s worth noting that this isn’t a Fibonacci ratio, but many traders—myself included—agree with its significance. Despite debates about its inclusion in Fibonacci tools, the 50% level remains widely used due to its psychological importance.
- 100%: This is the second most critical level, marking a full retracement to a prior swing low. This level is significant for mass psychology—traders watch to see if the market breaks below this point.
- 25%: Gann considered this the third most important level, although it’s not a Fibonacci ratio.
- 12.5%: Ranked fourth, this level represents a very shallow retracement.
- 6.125%: This shallow level surprised many, but Gann only applied it when stocks or averages were trading at very high levels, often during strong bullish trends.
- 66.6%: While close to the Fibonacci 61.8% level, Gann ranked this sixth in importance.
Gann’s approach reflects his focus on geometric patterns and market psychology. His levels—primarily quarters (0%, 25%, 50%, 75%) and thirds (33.3%, 66.6%)—align with natural human tendencies to think in fractions. For instance, traders often react emotionally when their portfolio loses 25%, 50%, or two-thirds of its value. These levels resonate with mass psychology, making them highly relevant even today.
Fibonacci Retracement Levels and How They Relate to Market Psychology
It’s fascinating how Gann’s principles, developed nearly a century ago, still apply in modern markets. While tools like Fibonacci focus on the golden ratio (61.8%), Gann’s method emphasizes simplicity and universal fractions. His insights were grounded in trader behavior, and his levels often align closely with psychological reaction points.
Wrapping Up!
If this method piques your interest, test it on your charts and see if it works for you. For those interested in learning more, Gann’s 45 Years in Wall Street is a great resource. It’s intriguing to note that even in the 1930s, traders wondered if making profits was harder “now” than in the past—just as we do today!
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