or relief rally happens due to short covering then we classify this as a decay Retracement. The cause of decay Retracement is a correction, technical bounce back or relief rally.
Retracement again has three trade decisive zones:
Bounce back or Trend Continuation zone: If the price finds support at 50% of retracement of its prior swing of up move or resistance at 50% of retracement of its prior swing of down move then this retracement is called bounce back price zone.
Example: Say nifty has fallen from 4700 to 4500. The prior trend of this 4700 high was a rising trend started from 4000 then it is classified as growth retracement. Taking the 50% retracement of this high low movement of 700 points to 350 I will say if the price finds support at 4350 then uptrend will resume and has high probability of crossing the previous high. Now the next big question is how do I will know that 4350 support is a valid support or is a mathematical eye wash for me. Support must be validated by the volume. By simple observation if I will find the fall below 4350 invites buying and escalates the price to bit higher level then I will conclude this price is a valid support.
Death Zone or trend reversal zone: In retracement principle if the price retraced more then 61.8% of its prior swing then it has remote chance of going back to its prior trend.
Range bound or consolidation zone: if price finds support or resistance at 38.2% retracement or never crossover the 38.2% level from the50% retracement then I can classify the retracement as a consolidation zone.
Day Trade Using Fibonacci Method
Fibonacci Retracement Techniqueproved to be the best and simple technique for day trading.
The Retracement is of two types
a. Growth Retracement : If the price action is rising in nature but in between some correction brings down the price and again escalate to higher levels then we can this Retracement as a growth Retracement. The cause of growth retracement is due to profit booking, short term correction or portfolio churning by Institutions.
b. Decay Retracement: If the price action is in falling in nature but in between some technical bounce back