Fibonacci is a concept used with technical analysis. It is also a powerful and flexible tool in the stock world. Let Forex Trading introduce you to the Fibonacci Forex.
What is Fibonacci Forex?
Fibonacci Forex with an infinite series of numbers starting from 0 and 1. At the same time, continuing according to the rule that each number is the sum of the previous two numbers. It plays an important role in the technical analysis of the stock market. In the Forex market, Fibonacci is applied through two main types: Fibonacci retracement and Fibonacci extension.
What is Fibonacci Forex?
Fibonacci Forex is an endless series of numbers, starting from the first two numbers 0 and 1. Each subsequent number in this series is created by adding the two numbers before it together. The Fibonacci series includes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377,…
It can be seen that if the first 4 digits are removed, the ratio between any number and the next larger number is usually approximately 0.168. It’s not fixed. But it can be observed through examples.
Similarly, the ratio between any two numbers and the smaller number is usually approximately 1.618. Or its inverse is 0.1618. For example, 8/13 ≈ 1.625, 13/21 ≈ 1.615, and so on.
Alternating numbers usually have an approximate ratio of 2.168. Or its inverse is 0.382. For example, 3/8 ≈ 0.375, 8/21 ≈ 0.38, and so on.
Ratios arise from the Fibonacci sequence in Forex such as 1.1618, 2.618, 0.382. They are often applied as important expansion or retracement points. They help traders identify points. The purpose is to exit orders or take profits strategically when entering a trade.
See more: Profession forex trade thanks to Fibonacci applying
Types of Fibonacci Trading
They focus on mastering two main forms: the Fibonacci Forex trending extension and What is Fibonacci retracement
- Fibonacci Extension
Fibonacci Extension, also known as FE. It helps investors decide when to exit a position or take profits. Fibonacci Extension plays an important role in determining the boundary where the main corrective trend ends. It is by way of identifying potential price levels that a trend can reach.
Levels below 0.618 are not widely used. Because profits at these levels are often limited. On the contrary, levels above 1,618 appear rarely. Because they are often in long-term up or down trends.
- Fibonacci Retracement
Fibonacci retracement, also known as Fibonacci Retracement (FR) in English. It plays an important role in analyzing trends in the market. Prices do not always increase continuously, but there will be periods of downward adjustment. During this time, FR will help identify support levels. This is where the price can stop during corrections and reversals. The aim is to continue the price increase journey. Similarly, in a bearish cycle, FR also plays an equivalent role.
These ratios can be viewed as support levels during a bullish cycle. However, they also reflect the role of resistance in bearish cycles.
The role of Fibonacci Forex
Investors do not need to memorize all the variations of the Fibonacci sequence in Forex. They only need to understand the two main types: Fibonacci Retracement (FR) and Fibonacci Extension (FE) sequences.
- The role of the FR series
Any trader who clearly understands the nature of the Fibonacci sequence in Forex retracement. Important support and resistance levels are formed according to the ratio of the Fibonacci sequence. The 50% level plays a key role. This is where price balance is often most evident.
When this zone is broken, the market can experience strong fluctuations. Or will become weaker. In this situation, the trader needs to make a decision. Whether they should exit or open a new position.
- The role of the FE series
In the market, the evolution of trends often revolves around the ratios in the Fibonacci series in the Forex extension. This means that the market can go through periods of strong increases or sharp declines. It exceeded investors’ expectations.
During this time, the Fibonacci method will adjust based on the actual price trend. Traders can create temporary predictions about the next direction of the market. Whether it will continue to increase or decrease. It is up to the trader to decide whether it makes the most sense for them to continue investing or stop.
Those who have used the Tradingview tool are often familiar with the use of the Fibonacci sequence. In addition, Fibonacci Forex can also be used on the Forex platform. With the highest popularity being on MT4. When analyzing the market, traders need to master how to use Fibonacci Forex. The purpose is to apply flexibly in each specific situation.
Trade with Fibonacci
When applying Fibonacci Forex to trading, you need to follow the 5 steps below:
- Step 1: Evaluate the current price trend. There are many aids in assessing the current direction of price (e.g. trendlines).
- Step 2: Use Fibonacci Retracement to mark the entry point.
- Step 3: Open an order. Potential retracement levels are often points that traders consider when opening positions.
Emphasis: In trading, you should only trade according to the trend. This means opening a Buy order when the market is in an uptrend. And open a Sell order when the market is in a downtrend. At the same time, the use of pending orders is limited. Can be an effective option for traders when trading with Fibonacci retracements.
- Step 4: Place Stop Loss at the top of the price decline or the bottom of the price increase. The purpose is to protect trading positions.
- Step 5: Use the Fibonacci extension for profit-taking target. When the price adjusted down and continued to increase from 0.618. If Trader places a Buy Limit order (pending buy order) here. They may have the opportunity to gain significant profits.
How to use the Fibonacci retracement sequence
Fibonacci retracement helps predict resistance and support levels. This is where the price is likely to reverse. The most important thing to remember is that the Fibonacci sequence is often most effective in clearly trending markets.
Is Trading Fibonacci Retracement Really Perfect?
Let’s review the advantages and disadvantages of the method. Thereby, it can be evaluated whether it is perfect or not.
Advantage:
- Accurate Pivot Points: Able to predict or confirm a change in trend. It changes with great precision when set up properly.
- Flexibility: This can be applied across any market and timeframe. But the signal will be more accurate on large timeframes.
- Displays market psychology: Fibonacci levels reflect both mathematics and market psychology. It assists in developing trading systems.
Defect:
- Difficulty in determining the starting point: Trends do not always go sideways. It leads to difficulty in determining the starting point
- Fake signals: There are many inaccurate signals. It causes complexity in market prediction.
- Cannot be used in Expert Advisors: Use of the Fibonacci grid cannot be automated. Especially in algorithmic strategies, which limits the applicability of this tool.
Thus, Fibonacci Trading in Forex is not necessarily the most perfect tool. But for intelligent use, it is the most useful tool.
Fibonacci Retracement combined with Trend Line
- When the trend is up
This is the daily chart of the AUD/USD currency pair.
Current expectations are if AUD/USD corrects from the most recent peak. Price may find support at the Fibonacci Retracement levels. Traders can place buy orders at these levels, waiting for the market to recover.
Now, let’s observe what happens after the High Swing.
The price fell below the level by 23.6% and maintained a downtrend for the next few weeks. Although it tested the 38.2% level, it did not close below it. Then, on July 14, the market continued to rise and surpassed its previous peak. Clearly, buying at 38.2% could pay off in the long run!
- When the trend is down
Below is the 4-hour chart of the EUR/USD currency pair.
The expectation of a downtrend is if the price declines from the current bottom. It could rebound and touch one of the Fibonacci levels as resistance. At the same time, traders place sell orders with the expectation that the price will continue to decline following the main trend.
Let’s investigate what happened next.
After the market recovered, the price fluctuated nearly 38.2% before retesting the 50.0% level. If you sell at 38.2% or 50.0%, you can achieve a significant profit.
Trading Fibonacci Retracement + Japanese candles
- Uptrend
The Fibonacci Retracement levels of 38.2%, 50%, and 61.8% act as potential support zones. At these points, traders often wait for candlestick signals to reverse from bearish to bullish. The purpose is to open a Buy order following the current uptrend. Strong reversal candlestick patterns from bearish to bullish are preferred to be combined with.
- Downtrend
The Fibonacci Retracement levels 38.2%, 50%, and 61.8% play an important role as resistance zones. In these areas, traders often wait for a candlestick reversal signal to open a Sell order following the current downtrend. Trend lines also act as resistance zones. Note that: Wait for the candlestick reversal signal from the transition from bullish to bearish. Especially at the support levels created by the Fibonacci Retracement sequence mentioned above.
Trading Fibonacci Extensions tool determines profit points
We start drawing by making two drags. Below are the specific steps that will be taken:
Step 1: Identify Swing Tops, Swing Bottoms, and reversal points. The stock’s previous points when the price reached support levels. Which is created by Fibonacci Retracement and rebound.
Step 2: Use the three points identified in Step 1. The purpose is to draw two straight lines through the Fibonacci Extension tool. From there, complete the graph.
The Fibonacci Extension levels will appear automatically. At that time, you will choose the profit target for the previous purchase point.
See more: Discover Exness – The world’s leading Broker
Use Fibonacci Forex to set Stoploss
Another option is to use stop loss based on recent Swing High/Swing Low levels. In case the price increases, you can place a stop loss below the latest Swing Low. The purpose is to protect profits. Conversely, when the price is falling, you can place a stop loss above the latest Swing High.
Using Fibonacci Forex places Stoploss at the next Fibo level
The first method is to place your stop loss above the next Fibonacci level. For example, if you place an order in the Fibonacci 38.2% zone. You can set your stop loss at the 50.0% crossing level.
One limitation is that it relies entirely on the effectiveness of the initial trade entry. You need to trust that the support or resistance zones will be protected. However, the market often has its own opinion. Price may break through resistance zones even though you consider them strong. This method is suitable for short-term intraday transactions.
Determine Stoploss based on Swing High/ Swing Low level
If you want to maximize safety, place your stop loss beyond both the most recent Swing High and Swing Low. In case the price is in an uptrend and you are in a buying position. You can then place your stop loss just below the latest Swing Low. Where is seen as a potential support level? Vice versa, when the price is in a downtrend and you are in a short position. You can place your stop loss just above the latest Swing High. The place acts as a potential resistance level.
Especially when increasing the space to allow orders to fluctuate in response to market fluctuations. However, the downside is that you have to reduce the order volume. Which causes the R:R ratio to be affected.
Epilogue
In Forex, Fibonacci is a concept and a powerful tool in technical analysis. Using Fibonacci Extension and Retracement helps traders identify important support and resistance levels. At the same time, it creates strategic trading opportunities. Above is everything Forex Trading wants to provide you about Fibonacci Forex.
Questions related to Fibonacci Forex
How to use Fibonacci Retracement in determining entry and exit points in the Forex market?
Fibonacci Retracement can be used to identify support and resistance levels. This helps the trader identify entry and exit points into the market. For example, a trader might buy when the currency price approaches a Fibonacci range support level. And sell when the currency price approaches a Fibonacci resistance level.
Is Fibonacci Retracement always the correct tool in Forex trading?
No, Fibonacci Retracement is not always accurate. It should be combined with other methods and tools in technical analysis and market psychology.
How does the Fibonacci Extension affect Forex trading?
The Fibonacci Extension is another tool based on Fibonacci ratios. It is used to determine the next levels a currency pair can move to after a Fibonacci Retracement level has been crossed. It can be used to identify profit targets or potential price levels at which a currency pair could reverse.
