Advanced Trading Fibonacci Retracement Strategy

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The .386, .50 and .618 retracement levels comprise the primary Fibonacci structure found in charting packages, with .214 and .786 levels adding depth to market analysis. These secondary ratios have taken on greater importance since the 1990s, due to the deconstruction of technical analysis formula by funds looking to trap traders using those criteria. As a result, whipsaws through primary Fibonacci levels have increased, but harmonic structures have remained intact. A Fibonacci fan is a charting technique using trendlines keyed to Fibonacci retracement levels to identify key levels of support and resistance. The Fibonacci retracement tool works on all timeframes.

level of risk

However, the strategy also works quite well for other liquid pairs. Wait for the end of the first wave and the beginning of the correction. Correction is the second wave and its beginning is the second point.

What is the fibonacci sequence

We can create Fibonacci retracements by taking a peak and trough on a chart and dividing the vertical distance by the above key Fibonacci ratios. Once these trading patterns​ are identified, horizontal lines can be drawn and then used to identify possible support and resistance levels. However, it’s always good to be familiar with the basic theory behind the Fibonacci technical analysis indicator so you can impress your mates (or dates?). But let’s see how you can actually use Fibonacci retracement levels in your forex trading.

What I think makes Fibonacci exceptional is that the Fib ratios are inherently part of natural systems, including the markets. Fibonacci ratios do not have biases for certain market conditions or economic cycles. And Fib ratios aren’t trying to fit a certain style or market; rather they are simply a natural part of market movements. Now let’s see if there is a fit with the Fibonacci percentages.

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Fibonacci extension levels are external projections of the tool used to forecast the extent of successive price expansions that emanates from the retracement of the initial price expansions. Whenever the Fibonacci tool is plotted on a significant price move. It projects the retracement and extension levels based on the measured distance of the price move.

And these signals are not so much false as inaccurate. The price can turn around without reaching the level or after breaking it and turn around in the middle of the zone. Even at the moment of exiting the flat, it is sometimes difficult to determine the starting point. The next position would have to be opened only on the next rising candle , however, it is not the beginning of a confident growing trend. Situations like this happen sometimes — they are difficult to foresee and therefore provided for in this high risk management. We would open a long position on the next growing candle, but the price rebounds from the level and goes down again, closing the position by stop loss.

The Fibonacci trading strategies discussed above can be applied to both long-term and short-term trades, anything from mere minutes to years. Due to the nature of currency changes, however, most trades are executed on a shorter time horizon. Try your hand in trading Fibonacci retracement levels – open the LiteFinance cabinethere. If you have any questions, ask them in the comments. The breakout of the 50% level by the corrective movement signals that the correction is turning into a reversal trend.

I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe. Set a stop loss at 1-3 points behind the level opposite from the trade opening point . Wait for the beginning of the trend reversal or its exit from the flat. Build a grid from the beginning of the trend to its extreme at the moment the first correction appears. Wait for the beginning of a new trend – a change in direction after a fading movement or exiting a flat.

The two points you connect may not be the ones other traders connect. One of the strategies assumes drawing retracement levels on all major price swings to mark where there is a group of Fibonacci levels. Doing this may help you point out a critical price area. However, it’s important to understand that using the Fibonacci retracements is very subjective. Given that there are several price swings in a single trading day, it doesn’t mean that every trader will be connecting the same two points. As always, you should combine signals generated by Fibonacci with other technical indicators.

Fibonacci Sequence

The first rebound of the correction took place at the 0.236 level of the Fibonacci sequence. Fibo levels are the points of the most probable price reversal at the end of the correction. You can read more about the strategy in the reviewSwing Trading Strategies.

  • So, if a trader goes long at when the price has decreased 61.8%, there is a good probability that it will stop depreciating at that level and instead move up.
  • Traders and market timers have adapted to this slow evolution, altering strategies to accommodate a higher frequency of whipsaws and violations.
  • The theory is that after price begins a new trend direction, the price will retrace or return partway back to a previous price level before resuming in the direction of its trend.
  • Phil Newton presents a different view of trading that he uses when break outs are not available.
  • Just like the Fibonacci ratios, many people will either take the inverse or square root of the “sacred ratios” to form more values.
  • Of course, the price could continue down after my entry and give me a loss near my initial stop-loss at Point-1.

5 waves (1-5) in the direction of the main trend, three of which are impulse waves and the other two are corrections. Wait until the price crosses the « 0 » level, move the stop loss to the breakeven level and secure the position with a trailing stop of at least points. We open the second trade at the moment of a rebound from the level of 0.382, and set take profit at around 0.236. After the second endpoint is locked, you can drag it horizontally to the right.

We can take it for granted that there is stop loss hunting especially during periods of low liquidity. These hunts can and will take the price to those areas one pip above or beyond the swing high, where the herd tends to place its stops. Place your stop loss a few pips the other side of that level and you might find better protection from the hunters, at a small extra premium. If your trade is for a large target, it can be worth it.

Fibonacci retracements

The second section deals with a range of issues faced by merchants such as goods pricing, profit calculation and currency conversion. The author is mostly famous for the Fibonacci numbers and the Fibonacci sequence, which are introduced in the third section. Fibonacci ratios are a series of percentages calculated by dividing figures along the Fibonacci sequence. There are quite a few different ratios, but the key ones are 23.6%, 38.2%, 61.8%, 78.6% and 161.8%. Before we get in too much about what Fibonacci is, let’s first answer the question “who is Fibonacci? ” Leonardo Pisano, or Leonardo Fibonacci as he is most widely known, was a European mathematician in the Middle Ages who wrote Liber Abaci in 1202 AD.


This was a swing move, which is now used as an indicator to help us determine levels in between, which may have a role to play in the price action. Please note how the price changes direction as it gets closer to Fibonacci levels. The AUD/USD has moved higher and we want to identify the retracement levels as target points. Again, we take the cursor from the bottom end of the screen to the highest recorded point.

Your charting software should come standard with these ratios, however, you are the one that puts them on your chart. Many traders use this tool which is why it is important to have a trading strategy that incorporates this. You are going to need to know where to apply these fibs. You will need to place them on the swing high/swing low. When I zoom into the 4-hour chart, I am able to see both a bull flag and contracting triangle type of forex chart pattern.

Live prices

The break below support and the break above resistance would indicate the break of the contracting triangle. A break of both the resistance and support levels will be the trigger I am looking for a trade setup. The future prediction will be close to accurate if the market goes beyond the high or low price point that was attained before the retracement occurred. You must understand that Forex trading, while potentially profitable, can make you lose your money. Never trade with the money that you cannot afford to lose! Trading with leverage can wipe your account even faster.

While the Fibonacci number sequence and golden ratio was used to solve the above equation, the result was that it produced a number sequence that has importance throughout the natural world. Draw the Fibonacci tool between the high and low end of a significant price move. This will project the retracement and expansion levels of these two points. This number is the inverse of the Golden ratio and it forms the basis for the 61.8% Fibonacci retracement level.

You can gain access to live fibonacci pattern forexs and use the built-in Fibonacci retracement tool to get started in minutes. If you’re looking for support levels, set the first point at a significant swing low and the second at a significant swing high. A fibonacci extension is used to project or forecast into the future where price may likely hit resistance or support. Then click the fibonacci retracement/extension icon as shown above on the MT4 trading platform and first click on point 1 and drag to point 2. Remember this is an uptrend so we started at the swing low 100% and placed the second 0% level at the swing high. Draw this on the support and resistance levels as the trend is going up or down.

Waiting for a confirmation of price reaction to a Fib level is a great method of reducing risking and making sure that the Fib placement you used is correct. The Fibonacci retracement tool has more importance and significance when used on a higher time frame. However, the levels tend to work well on all time frames in fact. Plain and simple, the Fibs have no value in zones where the price is consolidating, correcting, ranging and moving sideways. Traders tend to ignore these levels because currencies act and react to different tools and items such as tops and bottoms.

Using Fibonacci Retracements for Trading

Correction levels show the probability and depth of the corrective movement in the range from 0% to 100%, where the two points of 0% and 100% are the extremes of the current trend. Extension levels show points of possible correction in the future outside the 0-100% range. 3 waves (А-С) in the opposite direction, two of which are forming a new reversal trend direction and one wave is correctional. Hold the trade until the end of the day, thus saving on the swap. Go to the candlestick chart and watch the formation of reversal patterns. After the sideways movement, we apply a grid from the low of the beginning of the trend to its high.

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The first broke through 38.2%, but did not reach 50%. This means that we can’t be talking about the changing direction yet. Price is the calculated price, A is 0% price , B is 100% price , Level is the Fibonacci retracement level. I will tell you more about how to apply a grid to the price chart and how to work with other tools from the list in the following sections. If the price breaks through it, it can go further.

But the trade ideas must be confirmed by other confluence signals. Fibonacci levels can be useful if a trader wants to buy a particular security but has missed out on a recent uptrend. By plotting Fibonacci ratios such as 61.8%, 38.2% and 23.6% on a chart, traders may identify possible retracement levels and enter potential trading positions. Every trader, especially beginners, dreams of mastering the Fibonacci theory.

fib retracement

It is here at these key levels where Price Action traders would be looking for solid Price Action and hints from the market to get along with the uptrend. Number 3 represents the market respecting the key Fibonacci levels and moving back higher. However, I prefer to enter the pattern before the Neckline is broken. This is because if the price breaks the Neckline, it can still be a false breakout and come back to hit your stop-loss. In the previous GBP/USD example, the 88.6% Fib retracement level was the reason for the trade and a smaller chart pattern helped to pin the entry.

There was a bounce in the price action every time it got close or touched the Fibonacci level. The price action has been moving lower for some time, creating a new low. At this point, it is challenging to project where the price breaks to the mentioned lowes price. Extensions value relies on signaling support or resistance levels, which are often difficult to find using other technical methods. Fibs are an incredible tool for identify high probability market reversals, but always keep in mind that this, and any other, trading theory is purely hypothetical. Past performance can never guarantee future results and extensive training and knowledge should always be obtained before trying it out.