Dome – forecasting options trading system based on Fibonacci levels

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Fibonacci Trading Strategies

Fibonacci Levels: Different Types and How to Use them

Fibonacci Levels are based on the mathematical theory developed by the Italian scientist Leonardo Fibonacci in the 12th century. This theory is widely used outside of the financial analysis, moreover, Fibonacci sequence is commonly seen in many natural elements.

Technical analysis includes at least 6 indicators that are plotted on the chart in accordance with Fibonacci number formula. In this article we will look into all 6 Fibonacci indicators available on the MetaTrader 4 and MetaTrader 5 trading platforms. We will also discuss the trading strategies that are most suitable for Fibonacci indicators.

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Table of Contents

  • Fibonacci Levels and Their Types
  1. What are Fibonacci Lines?
  2. What are Fibonacci Time Zones?
  3. What is Fibonacci Channel?
  4. What are Fibonacci Arcs?
  5. What is Fibonacci Fan?
  6. What are Fibonacci Extensions?

  • Adjusting and Adding Levels to the Chart
  • Trading with Fibonacci Levels
  • Fibonacci Levels Trading Strategy
  • Fibonacci indicators Pros and Cons

Fibonacci Levels and Their Types

At the heart of each Fibonacci indicator lies the following sequence 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 … Each number in this sequence is the sum of the two previous ones. Dividing any number of the sequence by the preceding one will result in approximately 1.61. This value is used as the main ratio for all Fibonacci indicators.

Fibonacci levels are used to predict the further movement of the asset price. As a rule, such indicators are tied to an existing trend so as to predict its continuation or correction.

Fibonacci indicators provide benchmarks for price movements: what level the price is likely to reach, where it will reverse, etc. Based on these price targets traders place pending orders, stop losses and take profits.

In general, the Fibonacci levels perform the same function, but they differ both in terms of their appearance and functioning principles.

Fibonacci Levels (Lines)

It is the most basic and popular Fibonacci tool. On the chart it looks like a grid made up of several lines. The distance between them is calculated with the help of the Fibonacci ratio. As a rule, these lines are the key levels for the price dynamics.

The price tends to be drawn to the lines and often reverses when approaching such level. On the contrary, if the price breaks this level, it serves as a signal of a strong trend.

Fibonacci lines are tied to the last evident trend. A grid is stretched from the trend’s start (level 0) to its end (level 100). Thus, levels that lie within this range (61.8, 38.3, etc.) become benchmarks for possible reversals and levels that come after 100 (161.8, 261.8, etc.) become targets for trend continuation.

When following the trend and opening an order, you can set stop loss at internal levels and take profit at external levels. When trading retracements, the price targets should be set at the internal levels. You can also open positions on level breakthrough by placing pending orders.

Fibonacci Time Zones

Fibonacci time zones stand out from other Fibonacci tools. This indicator allows you to predict the next wave (retracement or trend) formation time, based on the previous momentum duration. Unlike lines, time zones are stretched from the extremum of trend’s start to the reversal point.

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Time zones are used quite rarely because a wavelength is different for each currency pair with each time frame. Moreover, this tool does not provide concrete signals for entering the market at a particular price, and, therefore, pending orders placement is not an option with this tool.

Fibonacci Channel

Fibonacci Channel is an improved version of the lines. Unlike the lines, which are always horizontal, the channel can be inclined. This feature allows you to build trend lines grid and determine the price targets, taking into account the trend’s angle.

Fibonacci Channel is built based on two extrema (from the first to the second one in the direction of the trend): if there is an uptrend, then the indicator is tied to the minimum levels and if there is a downtrend, the indicator is tied to the maximum levels.

The first trend line, which becomes either the main resistance or support level, is based on these points. You can adjust the position of the whole grid by moving the second line.

To determine the retracements, you need to start stretching the channel against the trend’s direction, from the second to the first extremum.

Fibonacci Arcs

Arcs is a tool that is most effective when there’s a flat price movement. It is used to catch trend retracement. Just like other Fibonacci indicators, the arcs are stretched between the boundaries of a trend or wave. At the same time, the arcs can be built from the trend’s start to its end or vice versa.

The classical version has only three arcs located within the initial trend range. However, when the price moves away from the key points, the lines diverge and widen the price targets range to some extent.

Fibonacci Fan

Fan is another dynamic Fibonacci tool. It might be compared to several rays that move from one point in different directions. The fan is stretched based on two trends or wave points starting with the first one (rays starting point).

If there is an uptrend, the fan will be located under the price chart. It will be located above the price chart if there is a downtrend, indicating the trend reversal level. Moreover, the Fibonacci fan can be used with a dynamic stop loss. You should move the protective order along one of the fan lines following the price movement.

Fibonacci Extensions

Extensions are often used as an auxiliary tool in wave analysis. This indicator is built based on three points that form two waves: trend and retracement waves. Extensions indicate the next benchmarks in trend direction. This tool can be used most effectively when setting take profit orders.

Time zones, fans and arcs are quite specific and are rarely used by traders (except trading systems that are specifically designed for these indicators). Fibonacci levels (lines) is quite a popular tool that is considered to be basic and is often used together with other strategies (for example, when searching for additional signals or confirming the existing ones).

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Adjusting and Adding Fibonacci Levels to the Chart

There are two ways to add Fibonacci levels on the Meta Trader 4 trading platform’s chart:

Select the “Insert” tab in the platform’s main menu, and then select “Fibonacci”. There will be 5 out of 6 Fibonacci tools in this category; the Fibonacci channel is in the “Channels” category.

You can also select the required tool in the Quick Access Toolbar at the top panel of the platform. By default, only Fibonacci lines are available on this panel. You can add other tools by right-clicking on the panel and selecting “Configure”. A window will open and you can select all the tools you want to add to the Quick Access Toolbar.

Each indicator can be adjusted after it has been added to the chart. You can change its color, adjust reference points’ parameters and add additional levels.

Fibonacci Levels Trading

Fibonacci levels (lines) are used both as a standalone indicator and as a part of strategies based on other indicators. One of the easiest ways to open an order with Fibonacci levels is to set a pending order at breaking through 100 level after retracement.

In order to do this, you need to stretch the Fibonacci grid after formation of a trend wave from the endpoint extremum to the trend’s startpoint extremum.

After that, a stop order is set below/above level 100. Take profit can be set slightly closer to level 161.8 in advance. Stop loss can be set either at the same distance from level 100 as the pending order (cautious tactic) or closer to level 61.8 (aggressive tactic).

When the stop loss is set at 61.8, the risk/profit ratio is approximately 1:1.5, with a more cautious scenario the ratio is about 1:5.

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Fibonacci Levels Trading Strategy

The Fibonacci levels are often used to confirm entry points or set stop losses and take profits. A trading strategy with Fibonacci levels, moving average and MACD would be a good example.

Firstly, you will need to add a trend indicator and an oscillator to the chart. MA period is 10 and MACD is set to default.

The following trading algorithm is employed (in this example for a sell order):

  1. The price crosses the moving average upwards.
  2. The MACD histogram crosses the line in the same direction.
  3. The Fibonacci grid is stretched along the last apparent trend wave. If the price crosses the moving average at the same time with the level rebounding or breaking in the desired direction, a sell order is opened.
  4. Take profit can be set at one of the next Fibonacci levels. Stop loss can be set at the previous level.

This strategy is suitable for trading with all major Forex pairs. The best time frames are H1-D1.

Fibonacci Levels Pros and Cons

The main advantage of Fibonacci levels is their versatility. These tools are based on more than a hundred-year-old theory that has been actively used in the stock market and Forex market analysis for decades. Recently, it has been adopted in the cryptocurrency trading as well. The tool’s versatility allows it to be relevant regardless of the market changes, whether it is more volatile or calm.

Another advantage of this instrument is its wide range of applications. Fibonacci levels can be used both for opening new orders and finding market exit points.

The main drawback of the Fibonacci indicators is the necessity of a preliminary analysis. With other indicators it is enough to add them to the trading chart. They are automatically set and start generating trading signals. The levels, however, should be set manually and traders have to determine the reference points themselves.

Fibonacci Levels will be an excellent tool for experienced traders and help them make profit in the financial markets. Beginners, however, will benefit from studying the wave theory basics first. They should also master the basic methods of levels trading before starting to use various Fibonacci tools.

Trading in financial markets is associated with high investment risks. To reduce these risks it is necessary to accurately follow the money management rules and always set stop loss. This article doesn’t constitute an investment/trading advice.

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How to trade with Fibonacci levels

The term “Fibonacci”, when used in trading, refers to a tool that measures the size of a price move and subsequently places horizontal support and resistance levels on a price chart. These support and resistance levels are referred to as “Fibonacci levels” and are used to make trading decisions in the same way as normal horizontal support and resistance levels.

The Fibonacci tool is applied to a price move

When the price moves in any direction, the beginning and the end of that move can be clearly identified. Using the Fibonacci tool, you measure the distance of that move and the Fibonacci tool will automatically place what is called Fibonacci retracement and extension levels – these are explained in more detail later.

The actual calculations of the Fibonacci levels are based on the numbers in the Fibonacci sequence, or rather the percentage difference between them. However, for this lesson, we will simply show you how to use this tool rather than explaining the mathematics behind it.

Start from the beginning of the price move to the end

The Fibonacci tool is applied manually. When measuring a downtrend, you apply the tool at the start of the move to the end – it is always applied from left to right. The chart below demonstrates this:

  1. The tool drawn starting at the top
  2. The tool ends at the bottom, drawn from left to right

For an upward move, the tool is applied from the bottom and ending at the top – again it is always applied from left to right. The following demonstrates this on a chart:

  1. The tool drawn starting at the bottom
  2. The tool ends at the top, drawn from left to right

Fibonacci levels are automatically placed in MT4

As you can see in the charts above, after the Fibonacci tool has been applied, it automatically places the Fibonacci levels between the start and the end of the move. These levels are referred to as retracement levels.

Fibonacci levels are shown as percentages of that total move. So the level that has been placed halfway between the start and the end of the move is the 50% retracement level. So if the price then retraced halfway back, it is said to have retraced to the 50% level. This then acts as support or resistance, depending on which way the trend is.

The retracement levels, therefore, tell us how far the pullback could be.

In the chart below you can see the 38.2%, 50% and 61.8% levels. These are commonly used levels that the price could retrace back to, although there are other retracement levels that have been identified and work well.

Fibonacci retracement levels can be used for entries

As you can see from the chart below, the Fibonacci tool was applied to an uptrend and the 38.2%, 50% and 61.8% levels was placed in between the start and the end of the move. As these are levels that the price could retrace back to, you can then use them for potential entries.

  1. Potential long entry at 61.8%
  2. Potential long entry at 50.0%
  3. Potential long entry at 38.2%

How to choose the correct level to enter

There are two ways to choose which retracement levels you use to enter into the markets:

1. Aggressively enter as the price reaches each level.

You could enter at each retracement level placing a stop loss on the other side of the Fibonacci level. If your stop-loss is hit, you simply enter again at the next level and carry on until the price goes back in your favour. This is an aggressive way of finding entries using the Fibonacci tool.

2. Wait until the price finds support or resistance at these levels first, and then enter.

You wait until the price finds support or resistance at these levels, wait for the price to move back in the original direction of the trend and then enter.

It is important to note that Fibonacci is not a trading system in itself – it has to be used in conjunction with or as part of a trading system.

Fibonacci extension levels

The Fibonacci tool is not only used to establish the retracement levels for traders as support or resistance; it can also project extension levels that show where the price could go to. Fibonacci extensions can, therefore, be used for profit taking or even counter trend entries.

The most common extension levels used by traders are the 138.2% and 161.8% levels, although there are many other extension levels used by different traders. The following is an example of extension levels in a downtrend.

  1. 138.2% extension level
  2. 161.8% extension level

The Fibonacci tool can be used to enter a position at one of the retracement levels when the price pulls back and then exit at one of the extension levels.

Below is a chart showing the extension levels of the Fibonacci tool applied to an uptrend. You can see the retracement and extensions levels.

  1. Potential long entry at a retracement level
  2. Potential exit at an extension level

How to choose the extension level at which to take profit

The extension levels can be matched to the corresponding retracement levels to maximise profitability. For example, if the price retraced to the 38.2% retracement level, then the related extension level would be 138.2.

  1. Short entry at 38.2% retracement level
  2. Corresponding extension level at 138.2%

The related extension to the 50.0 or 61.8 retracement level is the 161.8.

  1. Short entry at 50.0% retracement level
  2. Corresponding extension level at 161.8%

The first question you may ask is “why do Fibonacci retracement and extension levels correspond with each other?”. The answer comes back to a self-fulfilling prophecy. Banks and large financial institutions will look to take their profit at some point and targeting a Fibonacci extension level is one method they use. They will be expecting other banks and traders to exit at these levels and so based on these expectations, they do the same – hence a self-fulfilling prophecy.

However, it is important to note that this is not a fixed rule; for extension levels to work, they must be in a confirmed trend and this does not happen every time.

Using each level as a target

An easier method of using the extension levels is simply to exit when the price seems to find significant support or resistance there. In other words, if the price seems to have trouble breaking through a Fibonacci level, then this can be deemed a good exit.


So far, you have learned that .

  • . the Fibonacci tool places support and resistance lines on a chart, based on a price movement.
  • . the Fibonacci tool is always applied from the left-hand side over to the right-hand side of the price chart, for both long trades in an uptrend and short trades in a downtrend.
  • . the levels placed between the start and the end of the initial move are retracement levels and they show where the price could retrace back to.
  • . the most common Fibonacci retracement levels are 38.2 %, 50% and 61.8% and are commonly used for entries into the market.
  • . there are two ways to use retracement levels for entries, aggressively – entering at each level and passively – waiting for the price to go back in the original direction first.
  • . the levels placed beyond the initial price move are extension levels and they show where the price could go to.
  • . the most common extension levels are the 138.2% and 161.8% levels and are commonly used for exits out of the market.
  • . retracement levels and extension levels can correspond, with a retracement to the 38.2% commonly carrying on to the 138.2% and a retracement to the 50% and 61.8% commonly carrying on to the 161.8% level.

How to Trade with Fibonacci Retracements?

Fibonacci Lines are a powerful technical analysis tool that can be applied to both downward and upward trends, all assets and timeframes. The tool is represented on a price chart as a collection of horizontal lines that correspond to Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. It is used to determine the possible support and resistance levels. The tool is named after a 13th-century Italian mathematician Fibonacci and his self-named mathematical sequence.

How to Use Fibonacci Lines in Trading?

In order to use this tool effectively we first have to understand what support and resistance levels do represent. Support and resistance levels are psychological barriers that the price action is believed to test while moving in a particular direction. When approaching one of the levels, the trend can be expected to either continue its movement or bounce back and reverse. Certain experts believe that trend reversals happen more often around the retracement lines.

Retracement is a part of a larger trend

A retracement is a short-term price movement that goes against the general trend, and Fibonacci Lines excel at identifying those moments. The tool can be used for determining both buying and selling opportunities. During the uptrend, Fibonacci Retracement can be used as a buy signal during the pullback. During the downtrend, Fibonacci lines can be used to determine optimal short selling positions. Some traders believe that the most important retracement level to follow is 61.8, which can also be explained with basic market psychology. The possibility of price swings in this area is higher due to extensive buying or selling pressure (depending on the trend direction). Remember that retracement can be confused with a trend reversal, which in turn can negatively affect your trading performance.

Spots where the price action stumbles around the Fibonacci lines are marked with yellow

It can also be wise to accompany Fibonacci Lines with one of the momentum indicators (e.g. Stochastic Oscillator or MACD).

Set Up and Apply

Setting up Fibonacci Retracement is easy.

1. Click on the ‘Graphical tools’ button and choose ‘Fibonacci Lines’ from the list of available tools.

2. Find the most recent swing highs and swing lows. For downtrends, click on the swing high and drag the cursor to the most recent swing low. For uptrends, do the opposite: click on the swing low and drag the cursor to the most recent swing high.

3. Fibonacci Retracement levels will then appear on the price chart.


Fibonacci Retracement is an interesting technical analysis tool with limited, yet useful, functionality. Fibonacci Lines help identify optimal entry points during the so-called retracements. Traders, however, have to keep in mind that support and resistance levels provided by this tool are not always foolproof. Instead, they represent “areas of interest”. Fibonacci Retracement does not provide enough information to use it as a leading indicator but can become a useful complementary tool for making medium and long-term decisions.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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