Discover how to use the Fibonacci Retracement method to capture trading opportunities in the financial markets. How to use Fibonacci is an important part of developing a smart trading strategy. Join Forex Trading to learn about Fibonacci retracements before starting your effective investment process!
Everything about Fibonacci Retracement
In this overview of Fibonacci retracements, we will explore how this tool can be used to predict support and resistance levels on the price chart, thereby creating trading opportunities in the financial markets. main.
Do you understand what Fibonacci Retracement is
The Fibonacci Retracement method, derived from the Fibonacci sequence, represents horizontal lines on a chart. From there, it shows where support and resistance levels may appear. Each level is associated with a percentage, representing the extent of the previous price correction.
Fibonacci retracement levels include 23.6%, 38.2%, 61.8%, and 78.6%, with 50% also commonly used. Although not an official Fibonacci ratio. This makes this indicator very useful, as it can be plotted between two important price points. Such as highs and lows, and create levels automatically between those two points.
See more: Profession forex trade thanks to Fibonacci applying
Types of strategies based on Fibonacci retracement levels in Forex
Types of trading strategies include:
Trading based on adjustment level:
- Trade uptrends when prices recover: Fibonacci retracement levels are the most potential price reversal points at the late stages of corrective cycles.
- Take trades when the trend reverses: Breaking the 61.8% key level is often a significant change in price action. Furthermore, orders are often opened in this direction.
Trade by channel.
Take trades based on Fibonacci extension levels.
Pros and cons of using the Fibonacci method
In trading, using the Fibonacci method offers many advantages and disadvantages to consider:
Advantages of using the Fibonacci method
Pivot points determine accuracy by precise setting. These points can accurately determine the moment the price reverses in the early stages. Or confirm the change in trend direction in later stages quite accurately.
- Flexibility: This tool can be used on any asset and timeframe. However, the signal will be more accurate on higher timeframes. Although Fibonacci is popular in short-term trading such as scalpers on M1 and M5. However, price noise can cause errors.
- Accurate display of market sentiment: Most technical indicators are based on formulas that reflect the patterns of previous cycles. Fibonacci levels are not based solely on mathematical algorithms. It also reflects the psychology of the majority of market participants. This is important when building a Fibonacci trading system.
Disadvantages of using the Fibonacci method
Determining a starting point is sometimes difficult because a trend never goes completely sideways. Even when exiting this trend, locating a new starting point can become quite complicated.
- Fake signals: Fake signals often occur in this tool and are quite common. However, they cannot be considered completely wrong or accurate. The price may reverse before reaching the Fibonacci level or after surpassing it and returning within that zone.
- Cannot be used in Expert Advisors: It is not possible to write an algorithm to automate the Fibonacci grid into EA code. Therefore, this tool cannot be integrated into algorithmic strategies.
The Fibonacci grid is a support tool to divide the chart into multiple zones. Each zone reflects the possibility of a trend reversal or continuation. For example, the greatest probability of a reversal is usually in the range of 23.6% -38.2%. However, you should combine additional trend indicators, oscillators, and memory patterns to increase the accuracy of your trading decisions.
Instructions for performing Fibonacci Retracement from a to z
In this guide, you will be shown how to find the starting and ending points for each trend. Draw and use Fibonacci levels, and apply them to your trading strategy. At the same time, we will also look at tips and techniques to optimize the use of Fibonacci Retracement.
Strategy for applying Fibonacci Retracement
Fibonacci retracement is used to predict support and resistance levels. That is where the price is likely to reverse. It is important to understand that Fibonacci works best in trending markets.
The strategy is to buy at Fibonacci support levels when the market is in a UP trend. Also, sell at the Fibonacci resistance level when the market is in a DOWN trend. Fibonacci retracement is a technical tool that helps predict future price points.
The basic theory is that after a new trend begins, prices often correct before continuing in the original trend.
How to apply Fibonacci Retracement in an uptrend
This is the daily chart of the AUD/USD currency pair.
Here, the Fibonacci Retracement method has been drawn by dragging the mouse from the lowest point (Swing low) at 0.6955 on April 20 to the highest point (Swing high) at 0.8264 on June 3. Levels include 0.7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0%*), 0.7454 (61.8%), and 0.7263 (76.4%).
Currently, the expectation is that AUD/USD corrects from the most recent high point. Because it will find support levels at one of those Fibonacci retracement levels. Therefore, traders can place buy orders at these levels and wait for the market to rebound.
Note: The 50.0% level is not an official Fibonacci ratio, but it is still very important and commonly used.
Now, let’s look at what happened after the swing high.
The price corrected below the 23.6% level and continued to decline over the next few weeks. It even tested the 38.2% level but could not close below that level. Then, on July 14, the market continued to rise and surpassed the previous Swing high. This shows that buying at 38.2% will yield great profits in the long term!
How to apply the Fibonacci Retracement method in a downtrend
Now, let’s see how we would apply the Fibonacci retracement tool in a downtrend. Below is the 4-hour chart of the EUR/USD currency pair.
The chart shows a Swing High at 1.4195 on January 25 and a Swing Low at 1.3854 just a few days later, on February 1. The corresponding Fibonacci Retracement levels are 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).
The prediction for a downtrend is that if the price falls from this bottom, there could be a rebound and hit resistance at one of the Fibonacci levels. Traders can then place a sell order, expecting the price to continue falling in line with the main trend.
The market recovered, price hovering below the 38.2% level before retesting the 50.0% level. If you had sold at 38.2% or 50.0%, you would have had a good chance of making a profit.
In these two examples, we saw how to identify some short-term support or resistance levels at levels. Since so many people use the Fibonacci tool, these levels become natural support and resistance.
How to draw different types of Fibonacci Retracement levels
Drawing the Fibonacci Retracement method becomes easy with the help of tools.
Step 1:
First, you need to find a completed trend to which you want to apply Fibonacci retracement.
Step 2:
Next, you need to use a charting tool called “Fibonacci retracement“, available on many charting software such as TradingView.
Step 3:
When you start the tool, first click on the starting point of the trend (1).
Step 4:
Then, click a second time on the endpoint of the completed trend (2). You can customize the display levels, which typically include 23.6%, 38.2%, 61.8%, and 78.6%.
Once you complete the above steps, the Fibonacci retracement levels will appear on your chart. Traders often focus on these levels to identify reversal points during the next correction.
Determine the Fibonacci method with other Technical indicators
Fibonacci Retracement is an effective tool but is often combined with other tools to enhance trading signals. This helps determine how far the trend has moved.
Candlestick patterns and trend lines are also very useful when combined with the Fibonacci Retracement method. For example, when Bitcoin is approaching a retracement level, it is helpful to look for candlestick patterns such as bullish engulfing. If so, it could confirm the continuation of the new uptrend.
Finally, Elliott Wave Theory is an analytical method of considerable use. Elliott Wave focuses on studying the geometric shapes of the market. Fibonacci is especially commonly used to identify potential reversal points.
See more: Discover Exness – The world’s leading Broker
Applying the Fibonacci Retracement Tool to Forex Trading
The Fibonacci Retracement method is a simple and possibly effective method when trading Forex.
Step 1: Find the completed trend.
This tool applies to both bullish and bearish trends, as well as to all chart timeframes.
Step 2: Draw Fibonacci Retracement lines in the direction of the completed trend.
For example, draw from left to right in an upward direction for an uptrend, and from left to right, stop at the end of a downtrend.
Step 3: Wait for the price to reverse near important levels.
Pivot into these key levels to predict price reversals.
Step 4: Enter a trade in the direction of the initial trend.
If there is a retracement of the uptrend, the price will adjust lower. Time to enter a bullish trade near one of the four key Fibonacci retracement levels. Some traders will enter a position at a retracement level, while others may wait for the price to react and break higher before buying.
Conclude
Fibonacci Retracement is a powerful and flexible technical analysis tool that helps predict reversal points in price trends. Besides using Fibonacci Retracement, the Fibonacci extension is also an important tool, helping to determine the potential level of trends and specify target profit levels. The flexible combination of these two tools can provide a comprehensive and detailed view of the price chart. Continue following Forex Trading so you don’t miss important investment tips!
FAQ
What is Fibonacci Retracement?
Fibonacci in Forex is a technical analysis tool used to measure the correction level of a price trend. It relies on Fibonacci analysis levels to identify potential support and resistance points.
How many common Fibonacci Retracement levels are there?
There are five popular forex Fibonacci levels: 23.6%, 38.2%, 50.0%, 61.8%, and 78.6%.
What tools are commonly combined with Fibonacci Retracement?
Other technical analysis tools such as candlestick patterns, trend lines, and Elliott waves are often combined with Fibonacci in forex to increase the accuracy of trading signals.
