As those who have followed my thinking know, I believe trading is common sense. When you think of trading this way you can make sense of what many take as blind faith.
Take retracements as an example. Why do FIBO levels work? Is it because they are magic levels? There is no magic. These levels work because many traders, both technical and other, use the same retracement levels, such as 38.2%, 50%, and 61.8% and thus they increase in importance.
Using a common sense approach, retracements work because trends, no matter what the timeframe, need to shake out the weak positions with the trend (e.g. longs or shorts) to setup the next high or low.
The reason this works is that once a retracement runs out of steam, the market has less ability to absorb fresh buying (in case of an uptrend) or selling (in case of a downtrend) after weak longs (or shorts) have been shaken out.
Tip: FIBO levels give the market reference levels for retracements and can be a self-fulfilling prophecy because many use them more than magic levels and react once they hold. When you think of trading in these terms, trading is common sense.
