The markets are always effectively in balance or extension, or to put it another way, trading within a range or breaking out to new highs or lows. When markets are breaking out (in imbalance), how do you set reasonable targets for where the market may go ?
One method I use to create a framework for the trading day, is via Fibonacci extensions. This may have another name under your trading package, I use Sierra Chart.
I create projections based on the overnight highs and lows. As I’m in the UK, overnight for myself is between the end of the US session, and the start of the European session.
So, for example, the chart below shows two Fibonacci projections I created at the start of the day (start of UK trading session). The Fib projections use the overnight highs and lows (overnight trading range), and create 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, 423.6%, above and below that range.
This particular day has been chosen, as crude oil broke out of it’s sideways trading range, and rallied strongly to new highs. The rally was so strong we reached 423.6% extension. This is rare, but shows how when the market does brake out, Fib levels can provide targets, as well as support levels for trailing stops.
The fib extension was drawn at the very start of the day, but the market rallied perfectly, and stopped, at the 423.6% level, at the end of the day.
The chart below has been taken from today’s crude oil trading. It shows price expanding to the 100% levels, but remaining within a sideways channel. Neither the buying or selling today was strong enough for a significant breakout.