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Stock Trading FAQs – Fibonacci Retracement, Breakout Pattern Explained

In honor of St. Patrick’s Day, I’ve decided to only have green trading days for the rest of 2019.

All jokes aside, I’m out here, working and trying to improve on my trading.

Now, you might be asking, “But Jason, didn’t you make six figures in the month of January and February from trading penny stocks, what do you need to work on?”

(I teach people how to trade using my own real money. If you want my best ideas in your inbox or alerted via text then take me up on my 90-day challenge right here.)

The day you stop learning is the day you stop making progress. That said, I’ve found the best way for me to stay on top of my game is to teach traders like you what and how I’m making money trading penny stocks.

That said, teaching improves the teacher’s learning because it compels them to retrieve what they know, according to a study in Applied Cognitive Psychology by researchers Aloysius Wei Lun Koh.

Guess what I did yesterday?

Teach.

If you don’t know by now, I focus on primarily trading three stock chart patterns. Most of the stocks I trade are under $10 per share, and nearly all of them have a catalyst. My chart patterns help me discover areas of value (low risk – high reward).

If you missed yesterday’s free lesson on Facebook, check it out here. The lesson covered one of my favorite trading patterns- the Fibonacci retracement trade.

Of course, when you teach something to a large group, you have to expect to have traders from all levels in attendance… from raw rookies to battle-tested pros.

That said, there is never such thing as a “dumb question” because at the end of the day, we are all trying to learn, we are all trying to get better, and hopefully, make some money in the process.  

Stock Trading FAQs – Fibonacci Retracement, Breakout Pattern in Focus

Now, there were some frequently asked questions (FAQs) about my trading… these were boiled down to:

  • Does the stock need to go up over 100% to use the Fibonacci retracement?
  • What is a breakout pattern, and how is it different from your fish hook pattern?
  • Does volume matter when you’re using your patterns?

Well, let’s look at the first question.

Does the stock need to go up over 100% to use the Fibonacci retracement?

Well, not necessarily. I just found that it works really well when you use the Fibonacci retracement on small cap stocks, as well as penny stocks, that explode.

You see, the Fibonacci retracement is typically used by connecting two extreme points. When a stock runs up 100% from an area where it’s had support… well, those are two extreme points. Thereafter, your charting software would identify potential areas of support and resistance.

That said, you don’t necessarily need to wait for a stock to spike up 100% or more to use it… but, again, I’ve just found what works for me… and I’m sticking with that. If you find using the Fibonacci retracement works well for you on stocks that have been up 50% and pull back to a support level… then do that.

Moving on. Let’s take a look at how the Fibonacci retracement could be useful.

Here’s a look at the daily chart on Bio-Path Holdings (BPTH).

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If you look, the stock had support around the $1.90 area for over a month. In other words, the stock had a hard time breaking below that area. The stock caught fire and spiked up to nearly $9 in just two days due to a positive catalyst surrounding its acute myeloid leukemia (AML) treatment.

However, chasing a stock up like that doesn’t usually end well. It’s better to wait for a pullback to an area of value – or support – and buy there.

If you look at how BPTH went up to $8.84, only to open up below $7 the next day, and close at $5.50… that was a buying opportunity. However, if you chased the stock and bought at $8… well, chances are you would’ve taken a loss because the stock was down over 20% at that point.

This is where the Fibonacci retracement comes into play.

Notice how BPTH stock pulls right into the 50% retracement area, as shown in the chart earlier.

However, we knew that we should be more patient with this stock because we’ve seen penny stocks crash before… so we were waiting for the 38.2% retracement (around $4.45).

So I would buy above the retracement line, and stop below the line. It’s important to buy above the line and stop below… you have to time your entries.

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Now, with a stock like this… you have to watch it during the pre-market… wait to see some volume come in… and look for areas where you could buy… in this specific trade it was around the $4.60 level… and you could stop somewhere below that area, maybe a 5-10% stop loss from your entry.

Well, in the pre-market (before 9:30 AM EST), there was some buying pressure in BPTH… and it gapped up.

chart patterns, fibonacci retracement, breakout pattern, stock trading, stock trading faqs

Moving on, let’s take a look at our next question.

What is a breakout pattern, and how is it different from your fish hook pattern?

Now, the fish hook pattern falls under the category of oversold chart patterns. In other words, the stock has fallen significantly… and you typically see the relative strength index (RSI) below 30. The RSI is used as a gauge to see whether a stock is overbought or oversold. Generally, if the RSI is above 70, the stock is considered overbought, and you would want to stray away from it.

For example, here’s a look at a fish hook pattern.

chart patterns, fibonacci retracement, breakout pattern, stock trading, stock trading faqs

Notice how the stock fell from above $5 to 3.80. Moreover, if you look at the RSI (below the volume bars)… it was under 30. That let us know it was time to look for value buys because the stock was considered oversold, and it has a high probability of bouncing and running higher.

What do I mean by value buys?

It’s simple… you look for an area the stock has had a hard time breaking below (a support area). When you identify an area of support, that means traders are willing to step in and buy the stock… and you’re able to use that support area to develop a trading plan.

Here’s a look at what I mean by an area of support.

chart patterns, fibonacci retracement, breakout pattern, stock trading, stock trading faqs

If you look at the blue horizontal line, this is a support area. That said, YTRA has had a tough time breaking below this line… and it’s a good spot to start positioning for a move higher – or a bounce.

Well, I actually put real money on the line and alerted Millionaire Roadmap (MR) clients about my trade in YTRA.

You can read more about this YTRA trade here.

But how is this different from the breakout pattern?

Well, here’s a look at one breakout pattern.

chart patterns, fibonacci retracement, breakout pattern, stock trading, stock trading faqs

Basically, with a breakout pattern, the stock has a strong move higher… takes a rest… then continues higher, usually breaking above an area of resistance.

For example, if you look at the daily chart on Diffusion Pharmaceuticals (DFFN), this is known as a bull flag pattern. Notice how if you bought in the consolidation area… you could have stopped out below the $3.40 area, playing for the break out above the resistance area ($3.80).

Now, another question I get a lot is if volume matters?

Well, yes it does.

If you look at the chart above, you want to see the volume bars (below the price chart) larger than the other volume bars… this lets you know that there is actually buying pressure. Had the stock broke out on low volume… it could have easily turned back… known as the “fakeout breakout” – something I see happen all the time.

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