Forex traders have a difficult task: For this, they use both technical fundamental analysis. Fibonacci retracement levels and the rest of the Forex Fibonacci tools form the basis of almost any trading theory. Starting with basic support and resistance levels and ending with complex theories like the Elliott Waves Theory, the Fibonacci patterns are everywhere. Knowing something about what happened in the past helps traders forecasting the future.
For this, the Forex Fibonacci ratios are great tools. Confluence areas where multiple Fibonacci retracement levels form end up in strong support and resistance levels.
The Golden Ratio Think of the Elliott Waves Theory, for example. Multiple books were written on the importance of the Fibonacci sequence. Some showing complicated approaches, some more simplistic ones. However, this article aims at showing different ways to use the Forex Fibonacci levels. Moreover, the idea is to look how trading with Fibonacci works, using simple and effective trading methods.
Keep in mind though that Fibonacci numbers are virtually everywhere around us. They surround our lives. The first thing that comes to mind is the golden ratio. In technical analysis, the For example, in the Elliott Waves Theory, traders hunt impulsive waves. For this, they wait for a five-wave structure to unfold, and then for the price to retrace When this happens, they take a trade. This is the most popular trade example with retail traders that use Elliott for their trading.
A Forex Fibonacci sequence is more important for technical traders. Any trading platform offers the Fibonacci tools. They even have a dedicated button on the most popular trading platform MT4. Besides the Fibonacci retracement levels, the sequence appears in extensions, time zones, arcs, and so on. A Fibonacci retracement Forex tool is easy to use. Simply click and drag from the start to the end of a move and the trading software automatically projects the levels.
However, depending on the trading theory used, Fibonacci retracement and extension levels vary greatly. And, the list can go on. A good question here would be what this has to do with the extension levels.
However, the classical way to use the Fibonacci retracement levels is to look for price to hesitate around them. If there was a bearish trend and the market bounces, traders use them to sell into resistance. Take the chart below as the perfect example. You guessed it already: To this day, selling the However, bulls keep trying. The more the level gets tested, the less likely to hold further.
If the price keeps trying, it will give up eventually. Moreover, this bullish Forex Fibonacci strategy should have the take profit at the Next, traders simply should wait if the level holds.
If not, the A great Fibonacci Forex trading strategy uses the Fibonacci retracement levels in a zigzag. As a rule of thumb, the b-wave in a zigzag cannot end beyond the This gives traders a Forex Fibonacci strategy that works all the time. A zigzag is a three-wave structure. The whole drop from 1. Therefore, if we were to use the logic from a bit earlier, the The price has a scope to move further to But, in doing that, it meets strong resistance given by the Fibonacci retracement indicator.
The next step in this Fibonacci Forex strategy is to use pending orders. That is, pending sell limit orders. Hence, divide the area into four equal levels and place pending orders to sell for Fibonacci day trading techniques like this one work on any time frame. However, the key is from where to draw the Fibonacci retracement tool. Hence, the resulting Fibonacci retracements differ. When buying or selling a currency pair, traders look for the best opportunities they can find.
After all, trading is a game of probabilities. However, the idea is to enter a trade when the risk is minimum. Not to take a trade and keep the risk limited. Forex Fibonacci levels help to define the minimum risk. That is especially true when traders use a pattern recognition approach. Take harmonic trading, for example. Pesavento came and introduced the Yet, technical analysts wanted more. ALL Fibonacci retracement levels must be respected for the classical harmonic patterns as we know them today to make sense.
The same is with Elliott Waves Theory. Fibonacci Forex traders often find themselves in a clearly defined situation. Hence, it gives the stop loss level. Fibonacci retracements and extensions levels define technical analysis as we know it. However, the Fibonacci tool on any trading platform offers more than just retracement and extension levels. Fibonacci arcs and the Fibonacci fan tools combine the ratios in different ways. However, they aim for the same thing: In fact, the Fibonacci fan indicator is not that popular among Forex traders.
Before learning how to use a pivotal area, we must learn how to define one. For this, traders use different Fibonacci retracement levels. The idea is to measure two different moves one bullish and one bearish, or the other way around. Next, look for the golden ratio levels on both moves to be significant. In fact, look for a Fibonacci confluence area. When all the factors above align, the market formed a pivotal area. That is one of the most powerful trading tools in technical analysis.
When it comes to support and resistance levels, the bigger the time frame, the better. Starting from left to right, the first move the market makes is bearish.
We simply look for the The market hesitates and rejects from it. Because of that, we start looking for a possible pivotal area. Next, we measure with another Fibonacci retracement tool the swing higher. Again, the market reacts from the resulting As such, look for the price to break above. It did, after a perfect bounce from the Such a Fibonacci retracement day trading strategy works every time.
The key is to follow the rules. Where do you think the price will move next? Providing the pivotal area holds, the next level of interest is the upper 6. That one is more than a thousand pips higher from current levels. And now I will show you a video example of how to take advantage of Fibonacci zones. The video below will show you the way a Fibonacci zone could appear to be a turning point on the chart.
The video shows a price interaction with the This created a nice trading opportunity on the chart, which I took advantage of. Here are some of the most important Fibonacci extensions and retracements levels in Elliott Theory rules:.More...