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Why does a price breakout?
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Why does the price always do crazy things around the 200SMA
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Why does the price stall when it hits a major psychological resistance or support level?
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Why does the price often do things around Fibonacci levels?
All all the above cases the answer is the same. [B]There are millions of traders around the world using them, and looking at them, so the price is going to do something important when it hits those levels,[/B] or crosses over.
Millions of eyes on there computer screens looking at the 130.000 because it’s a round number and just so happens to be the 61.8% level, so traders have orders there, having educated opinions on what is going to happen.
[B]Why does the price do more when many of the above 4 things are at the same price?[/B]
Because they are lines of confluence.
Dont think of the market like you are trading the EUR/USD or USD/JPY or ect ect ect. It’s easier to think of it like you are trading, psychology, methods, and data.
So if the 130.000 level is a major support and resistance level, or even support turned resistance, its touching the 200SMA, and is at the 38.8% fib level. Then many methods are over lapping at that level and the price is going to do something major.
Just like any other method, fibs don’t work well unless used in conjunction with other methods. You don’t go taking a trade on fibs alone.
The most obvious example is this. Head and shoulder patters are the most common trading formations in the world. So when one is formed, and is very obvious, so many traders around the world can see it. What happens when the price breaks out of the neck line? Its a major breakout because many traders have there eyes on it… Get it…They see it breaking out and the know what a head and shoulder pattern is so traders are all over it. But still you don’t go trading the h&s by itself, you overlay it with other methods you are familiar with to make sure it’s a valid breakout.
If you suck at fibs. You are probably drawing them in no mans land. Only draw them from points that are obvious and are likely that other traders are drawing them from those points too.
[B]One more example. If everyone around the world had the same chart. Read exactly the same data. And only had on there chart something stupid, like a 176.9864 Simple Moving Average. What’s going to happen when the price gets near the 176.9864SMA? Something big! Because everyones looking at it. lol should of just said that from the beginning. Anywayz[/B]