Fibonacci, Reading The Retracements

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker For Experienced Traders!

Fibonacci Retracements

Table of Contents

Fibonacci Retracements

Introduction

Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback. Fibonacci Retracements can also be applied after a decline to forecast the length of a counter-trend bounce. These retracements can be combined with other indicators and price patterns to create an overall strategy.

The Sequence and Ratios

This article is not designed to delve too deep into the mathematical properties behind the Fibonacci sequence and Golden Ratio. There are plenty of other sources for this detail. A few basics, however, will provide the necessary background for the most popular numbers. Leonardo Pisano Bogollo (1170-1250), an Italian mathematician from Pisa, is credited with introducing the Fibonacci sequence to the West. It is as follows:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……

The sequence extends to infinity and contains many unique mathematical properties.

1.618 refers to the Golden Ratio or Golden Mean, also called Phi. The inverse of 1.618 is .618. These ratios can be found throughout nature, architecture, art, and biology. In his book, Elliott Wave Principle, Robert Prechter quotes William Hoffer from the December 1975 issue of Smithsonian Magazine:

….the proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it the golden mean.

Alert Zones

Retracement levels alert traders or investors of a potential trend reversal, resistance area or support area. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance. Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bullish reversal. Chart 1 shows Home Depot retracing around 50% of its prior advance.

The inverse applies to a bounce or corrective advance after a decline. Once a bounce begins, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bearish reversal. Chart 2 shows 3M (MMM) retracing around 50% of its prior decline.

Keep in mind that these retracement levels are not hard reversal points. Instead, they serve as alert zones for a potential reversal. It is at this point that traders should employ other aspects of technical analysis to identify or confirm a reversal. These may include candlesticks, price patterns, momentum oscillators or moving averages.

Common Retracements

The Fibonacci Retracements Tool at StockCharts shows four common retracements: 23.6%, 38.2%, 50%, and 61.8%. From the Fibonacci section above, it is clear that 23.6%, 38.2%, and 61.8% stem from ratios found within the Fibonacci sequence. The 50% retracement is not based on a Fibonacci number. Instead, this number stems from Dow Theory’s assertion that the Averages often retrace half their prior move.

Based on depth, we can consider a 23.6% retracement to be relatively shallow. Such retracements would be appropriate for flags or short pullbacks. Retracements in the 38.2%-50% range would be considered moderate. Even though deeper, the 61.8% retracement can be referred to as the golden retracement. It is, after all, based on the Golden Ratio.

Shallow retracements occur, but catching these requires a closer watch and quicker trigger finger. The examples below use daily charts covering 3-9 months. Focus will be on moderate retracements (38.2-50%) and golden retracements (61.8%). In addition, these examples will show how to combine retracements with other indicators to confirm a reversal.

Moderate Retracements

Chart 3 shows Target (TGT) with a correction that retraced 38% of the prior advance. This decline also formed a falling wedge, which is typical for corrective moves. The combination raised the reversal alert. Chaikin Money Flow turned positive as the stock surged in late June, but this first reversal attempt failed. Yes, there will be failures. The second reversal in mid-July was successful. Notice that TGT gapped up, broke the wedge trend line and Chaikin Money Flow turned positive (green line).

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker For Experienced Traders!

Chart 4 shows Petsmart (PETM) with a moderate 38% retracement and other signals coming together. After declining in September-October, the stock bounced back to around 28 in November. In addition to the 38% retracement, notice that broken support turned into resistance in this area. The combination served as an alert for a potential reversal. Williams %R was trading above -20% and overbought as well. Subsequent signals affirmed the reversal. First, Williams %R moved back below -20%. Second, PETM formed a rising flag and broke flag support with a sharp decline the second week of December.

Golden Retracements

Chart 4 shows Pfizer (PFE) bottoming near the 62% retracement level. Prior to this successful bounce, there was a failed bounce near the 50% retracement. The successful reversal occurred with a hammer on high volume and followed through with a breakout a few days later.

Chart 5 shows JP Morgan (JPM) topping near the 62% retracement level. The surge to the 62% retracement was quite strong, but resistance suddenly appeared with a reversal confirmation coming from MACD (5,35,5). The red candlestick and gap down affirmed resistance near the 62% retracement. There was a two-day bounce back above 44.5, but this bounce quickly failed as MACD moved below its signal line (red dotted line).

Conclusion

Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. Corrections and counter-trend bounces often retrace a portion of the prior move. While short 23.6% retracements do occur, the 38.2-61.8% zone covers the most possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone. Other technical signals are needed to confirm a reversal. Reversals can be confirmed with candlesticks, momentum indicators, volume or chart patterns. In fact, the more confirming factors, the more robust the signal.

Using with SharpCharts

You can use our ChartNotes annotation tool to add Fibonacci Retracement Lines to your charts. Below, you’ll find an example of a chart annotated with Fibonacci Retracement Lines.

To learn more about how to add this annotation to your charts, check out our Support Center article on ChartNotes’ Line Study Tools.

Fibonacci Retracements

Traders who use technical analysis are proud of applying scientific methods of observation and borrowing mathematical concepts from science… but then they fall prey to a superstition from the Middle Age that has never been proven. This is one of the great mysteries of the trading world.

Italian mathematician Leonardo Pisano Bigollo, who lived between 1170 and 1250 in Italy and was nicknamed “Fibonacci” (“Son of Bonacci”), rediscovered a number sequence that had been known in India for centuries before him. The Fibonacci sequence is only one of many, many arithmetic sequences but does have some intriguing properties. For one thing, the Fibonacci sequence has a relationship to various phenomena in nature, like the spiral of the nautilus shell, sunflower petals, and so on. Other interesting properties include that it applies equally to negative numbers as to positive ones. Also, every third number is a multiple of 2, every fourth number is a multiple of 3, every fifth number is a multiple of 4, and so on.

The Fibonacci sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each number is the sum of the two preceding numbers. The magic of the Fibonacci sequence is that each number is approximately 1.618 times greater than the preceding number. This ratio forms the basis of the Golden Rectangle used by the ancient Greeks in their buildings and in painters throughout history to size canvases for the most pleasing shape to the human eye. If you divide any number by the one preceding it, you get 61.8. Sometimes the numbers after the decimal points are not exactly 61.8 − 8 / 13 = 0.6153 and 55 / 89 is 0.6179, for example. The higher you go in the sequence, the closer the number gets to 1.618 or 61.8. Another ratio that is consistent across the entire sequence is the 38.2% ratio, obtained by dividing any number by the number that is three places further on.

In trading, Fibonacci numbers are often used to estimate the amount a move will retrace before resuming. We all know prices do not move in a straight line, but rather in a zigzag patterns of two steps forward, one step back. We use Fibonacci ratios to estimate the one step back as a function of the two steps forward. The process entrails finding a low and then the next high before a pullback. We assume the pullback or retracement will be in one of the key Fibonacci ratios – 23.6%, 38.2%, or 61.8%. When the price has pulled back as much as 61.8% of the previous upmove, we expect it to halt and that is where support will lie. If not, we expect a dip all the way to the lowest low where the upmove began, or a 100% retracement (even though 100 is not a Fibonacci number). Most analysts also include the 50% retracement, an idea that came from an early 20 th century trader named W.D. Gann, although 50% is not a Fibonacci number, either.

See the chart below, which depicts a picture-perfect 61.8% retracement of GBP/USD after a strong upmove. This chart certainly seems to validate the application of the Fibonacci sequence.

Fibonacci retracement working perfectly on GBP/USD daily chart

Now compare it to the next chart, where the 61.8% retracement was broken. The price then proceeded to bounce but then go almost all the way to 100% retracement — and then surpass the previous highest high. We may say placing support at the 61.8% retracement level was a failure but the “theory” worked in the end — the price did proceed to nearly 100% after the 61.8% retracement was broken.

Fibonacci retracement failing on USD/CHF daily chart

The next figure shows the EUR/USD on the H4 timeframe. It is visually obvious that a pretty good place to put a stop in a euro short is just above the 25% retracement level.

Fibonacci retracement as a stop-loss level on EUR/USD 4-hour chart

Another example below is showing EUR/USD on a 5-minute basis. The retracement surpasses 50% but does not make it to 61.8%, from which we deduce the rally is failing and we go short. Sure enough, the price goes almost all the way to the lowest low, our starting point, before resuming the upmove. As a general rule, Fibonacci retracements work somewhat better on shorter timeframes than on daily or weekly ones, which is probably due to so many traders accepting the Fibonacci retracement concept.

Fibonacci retracement on EUR/USD 5-minute chart

There is no reason why securities prices should move in accordance with the Fibonacci sequence any more than they should follow a geometric or triangular sequence, or another magical number, pi. All number sequences are “natural law” — and none more so than pi. And yet otherwise rational and scientifically-minded people accept that securities prices, including Forex, do often move according to the Fibonacci sequence. The only sensible explanation is that:

  • A sufficient number of instances have been observed in which prices seem to be following the sequence
  • A sufficient number of traders believe or suspect the Fibonacci sequence will work that they apply and therefore it does work — a self-fulfilling prophecy.

Faith in the Fibonacci sequence is especially strong in Forex, despite no academically respectable studies having ever been done to validate the hypothesis that Forex prices follow the Fibonacci sequence. But because so many Forex trader embrace the concept, it does not pay to get sniffy about the lack of evidence. Many traders draw the Fibonacci lines as a matter of routine, just in case.

If your trading platform does not offer a tool to draw Fibonacci retracements, you can use our free Fibonacci calculator for that purpose.

Admiral Markets Group consists of the following firms:

Admiral Markets Cyprus Ltd

Admiral Markets Pty Ltd

Admiral Markets UK Ltd

Reading time: 23 minutes

Leonardo Pisano Bogollo, an Italian mathematician, first introduced the Fibonacci sequence to the West in the 13th century. These strings of numbers contain unique mathematical properties and ratios which can be found – to this very day – in nature, architecture and biology. The wide-ranging presence of these ratios in the Universe also extends to the financial markets. It’s just one reason why many traders use a Fibonacci trading strategy to identify turning points in the market, and why you should consider it too.

In this article, you will learn the unique properties of the Fibonacci sequence in Forex trading, as well as how to use Fibonacci levels across different markets through a Fibonacci trading strategy. You will also learn specific techniques on trading Fibonacci by using Fibonacci retracement levels and Fibonacci extension levels and how to get started on an advanced, free to use Fibonacci trading software. Let’s get started!

What is Fibonacci trading?

Before we look into the mechanics of Fibonacci trading and how it translates into a Forex Fibonacci trading strategy, it is important to understand the Fibonacci sequence and the unique mathematical properties it provides first.

Understanding the Fibonacci sequence in Forex trading

The Fibonacci sequence is a sequence of numbers where, after 0 and 1, every number is the sum of the two previous numbers. This continues to infinity.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765….

There are some interesting relationships between these numbers that form the basis of Fibonacci numbers trading. While we cannot cover all of these relationships in this article, below are the most important ones you will need to know about when we look at a Forex Fibonacci trading strategy later on:

  • If you divide a number by the previous number it will approximate to 1.618. This is used as a key level in Fibonacci extensions as you’ll learn later on in the article.
  • If you divide a number by the next highest number it will approximate to 0.618. This number forms the basis for the 61.8% Fibonacci retracement level.
  • If you divide a number by another two places higher it will approximate to 0.382. This number forms the basis for the 38.2% Fibonacci retracement level.

1.618 is known as the Golden Ratio, Golden Mean, or Phi. The inverse of this is 0.618 and both numbers are found throughout nature, biology and in the cosmos. In fact, according to William Hoffner from the Smithsonian Magazine in December 1975: “The proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion.”

So, how are the Golden Ratio and other Fibonacci levels used in Fibonacci trading? Firstly, these ‘special’ numbers are split into Fibonacci retracement levels and Fibonacci extension levels which then provide values where possible turning points could take place in the market. Let’s have a look at these in more detail.

How to use Fibonacci retracement levels

Fibonacci retracement levels help to provide price levels of support and resistance where a reversal in direction could take place and can be used to establish entry levels. The retracement levels are based on the prior move in the market:

  • After a big rise in price, traders will measure the move from bottom to top to find where price could retrace to before bouncing higher and continuing in the overall trend higher.
  • After a big fall in price, traders will measure the move from top to bottom to find where price could retrace to before correcting lower and continuing in the overall trend lower.

Before we go through how to use Fibonacci trading software and Fibonacci indicators to help identify these retracement levels, it can help to view the pattern visually which is shown below:

Earlier, we calculated the relationship between the Fibonacci sequence to identify some important Fibonacci ratios such as the 0.618 (which forms the 61.8% Fibonacci retracement level) and the 0.382 number (which forms the basis of the 38.2% Fibonacci retracement level).

There are also other Fibonacci trading ratios that traders use such as 23.6% and 78.6%, among others. The four listed in the diagrams above are the most commonly used Fibonacci retracement levels.

  • The buy pattern is used when the market is an uptrend. Traders will attempt to find how far price retraces the X to A move (swing low to swing high) before finding support and bouncing back higher (B). These support levels are the Fibonacci retracement levels and could be a 23.6%, 38.2%, 61.8% or 78.6% retracement of the X to A move.
  • The sell pattern is used when the market is in a downtrend. Traders will attempt to find how far price retraces the X to A move (swing high to swing low) before finding resistance and correcting back lower (B). The B point could be any one of the Fibonacci retracement levels already listed.

It is common for traders to use other technical analysis tools such as trading indicators or price action trading patterns for confirmation of which Fibonacci retracement level price may turn. This is covered in more detail later on in the Forex Fibonacci trading strategy section.

If you’d like to learn more about technical tools that can help with identifying Fibonacci retracements, take a look at the webinar below, which covers how to use basic Fibonacci retracements and extensions in MetaTrader 4

This webinar is from our Trading Spotlight webinar series where three pro traders offer live sessions three times a week. Just some of the topics they cover include how to do technical analysis, how to identify common chart patterns and trading opportunities and how to implement popular trading strategies. To reserve your spot in these complimentary webinars, simply click on the banner below:

Before we look at how to calculate Fibonacci retracement and extension levels and how to use the Fibonacci retracement tool in your trading software, let’s look at what exactly Fibonacci extension levels area.

How to use Fibonacci extension levels

Fibonacci extension levels also help to provide price levels of support and resistance but are used to calculate how far price may travel after a retracement is finished. In essence, if Fibonacci retracement levels are used to enter a trend, then Fibonacci extension levels are used to target the end of that trend.

As previously discussed the 1.618 is a key number in the Fibonacci sequence which is why it is called the Golden Ratio. This forms the basis of the most popular Fibonacci extension level – the 161.8% level.

In an uptrend, traders will attempt to enter the ‘bounce’ at point B and then measure the last retracement from A to B, to find how far the trend could go before reaching point C – the 161.8% level.

In a downtrend, traders will attempt to enter the ‘correction’ at point B and then measure the last retracement from A to B, to find how far the trend could go before reaching point C – the 161.8% level.

Reversal traders may also use the 161.8% level to enter into counter-trend trades but this is more suited to advanced traders.

So far, you have learnt that Fibonacci retracement levels are used to find support and resistance levels to enter a trade in the direction of the preceding trend. Fibonacci extension levels are used to calculate how far the trend could go before reversing and are used as exit levels.

Now you know what type of visual pattern and cycle, or wave, formations you are looking for how do we plot this on the price chart of a market to find entry and exit levels? You need some Fibonacci trading software. The good news is that Admiral Markets provides this to its traders for free!

Fibonacci trading software and the Fibonacci indicators

When using Fibonacci trading software, there are two different types of Fibonacci indicators that can help traders plot retracement and extension levels. All the trader needs to do is measure the X to A cycles as shown in earlier examples and will be explained in more detail in the next few sections.

Once the trader has measured the X to A distance using the Fibonacci tool, the software will then divide the vertical distance by the Fibonacci ratios (23.6%, 38.2%, 61.8%, 78.6%, etc) to plot the Fibonacci levels. This means that you do not need to learn how to calculate Fibonacci retracement and extension levels manually as the software will plot it for you – making it a huge time saver!

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing the price chart of EUR.NZD, a trading ticket window, the Market Watch column, the Toolbox window, the different Fibonacci tools available and an example of Fibonacci retracement levels on price.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

With the MetaTrader trading platform provided by Admiral Markets, users can access a wide variety of Fibonacci indicators and tools. It also allows users to access other trading indicators and technical tools and trade directly from the chart – in essence, providing you with an all-in-one trading platform. Admiral Markets offers the following MetaTrader trading platforms which are all free to download:

  • MetaTrader 4
  • MetaTrader 5
  • MetaTrader WebTrader
  • MetaTrader Supreme Edition (A custom plugin for MetaTrader 4 and MetaTrader 5, created by Admiral Markets and professional trading experts)

The MetaTrader 5 trading platform offers traders the ability to trade on multiple asset classes and provides more features than MetaTrader 4 such as a wider range of chart timeframes and styles. To start using the full range of Fibonacci indicators and to follow through the live trading examples in the next few sections, click on the banner below to start your free download.

How to use the Fibonacci retracement tool in MetaTrader

Before we look at how to use the Fibonacci retracement tool in your MetaTrader trading platform, let’s first set up the correct Fibonacci levels using the following steps:

  1. Open your MetaTrader trading platform provided by Admiral Markets.
  1. From the top menu, select Insert -> Objects -> Fibonacci. This will show the following Fibonacci indicators:
  1. The Fibonacci retracement tool is used to plot both Fibonacci retracement levels and Fibonacci extension levels. After selecting Fibonacci Retracement, your cursor will change from an arrow to a plus sign with some small horizontal lines beneath it.
  1. After you click on the chart then you will find a box pop up which allows you to customise your Fibonacci levels, as shown below:
  1. The ‘level’ column is the Fibonacci ratio derived from the Fibonacci sequence. The ‘description’ is how it translates into a Fibonacci level for trading. While there are different Fibonacci ratios the most commonly used are:
  1. Some of these levels and descriptions may not be in your trading platform. To add them, simply click the Add button on the right.

Now let’s look at how to plot Fibonacci levels on to your chart and what they actually mean.

Drawing Fibonacci retracement levels in an Uptrend

  1. Find the X to A cycle which is one big cycle, or wave higher.
  2. Select the Fibonacci Retracement tool from the top menu: Insert -> Objects -> Fibonacci -> Fibonacci Retracement.
  3. Left-click and hold down at the bottom of the cycle, X.
  4. While holding the mouse button down, drag the line to the top of the cycle, A.
  5. The Fibonacci indicator will automatically draw the Fibonacci retracement levels on, as shown below:

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing Fibonacci retracement levels drawn on using the Fibonacci retracement tool in an uptrend.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

In the price chart above, the Fibonacci levels are plotted as horizontal lines with the Fibonacci descriptions written on the right side of the chart. You may have noticed that the X level is plotted as 100 and the A level is plotted as 0. This is because if the price retraced from point A all the way back to point X it would be a 100% retracement.

This also means that when price retraces to the 38.2 level – for example – it means that price has retraced 38.2% of the X to A move. In an uptrend, these Fibonacci levels provide areas of support where the market could bounce higher and continue the trend up. In the example above price did indeed find support at the 38.2% Fibonacci level. Traders will then look at other technical analysis tools such as price action patterns to find more clues on whether price could bounce at this level.

Drawing Fibonacci retracement levels in a downtrend

  1. Find the X to A cycle which is one big cycle, or wave lower.
  2. Select the Fibonacci Retracement tool from the top menu: Insert -> Objects -> Fibonacci -> Fibonacci Retracement.
  3. Left-click and hold down at the top of the cycle, X.
  4. While holding the mouse button down, drag the line to the bottom of the cycle, A.
  5. The Fibonacci indicator will automatically draw the Fibonacci retracement levels on, as shown below:

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing Fibonacci retracement levels drawn on using the Fibonacci retracement tool in a downtrend.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

In the price chart above, the Fibonacci levels are plotted as horizontal lines with the Fibonacci descriptions written on the right-side of the chart. You may have noticed that the X level is plotted as 100 and the A level is plotted as 0. This is because if the price retraced from point A all the way back to point X it would be a 100% retracement.a downtrend, these Fibonacci levels provide areas of resistance where the market could correct lower and continue the trend down. In the example above, price did indeed find resistance at the 38.2% Fibonacci level and then correct lower. Typically, traders would look at other technical tools to further confirm the possibility of a correction lower. This will be evident in the next section as we go through a Forex Fibonacci trading strategy.

How to use a Fibonacci trading strategy

So far you have learnt that in an uptrend Fibonacci retracement levels can act as a support level where price may bounce and continue moving higher. Conversely, in a downtrend Fibonacci retracement levels can act as a resistance level where price may bounce and correct lower. You have also learnt how to plot these levels using the Fibonacci indicator in the MetaTrader trading platform provided by Admiral Markets, as well as how to use Fibonacci extension levels.

Both Fibonacci retracement levels and Fibonacci extension levels are used by a wide variety of traders covering different trading styles, such as long-term trading, day trading and swing trading. The levels are also used across different markets such as Forex, as well as on Stocks, Indices and Commodities.

While the next section will focus on a Forex Fibonacci trading strategy, you can apply and test the same principles on other asset classes. In fact, with Admiral Markets you can access a wide variety of different asset classes completely risk-free by using a demo trading account. This will also give you the chance to practice and test your Fibonacci trading skills with zero risk! Simply click on the banner below to open a demo account today:

A Fibonacci Forex trading strategy

We have already established that the price of a market can often turn, or find support or resistance, at different Fibonacci levels. Within a Fibonacci trading strategy, traders can go one step further and add in more technical analysis to help confirm whether the market will actually turn or not.

One of the most popular confirmation tools that can help identify whether the price of a market may turn or not is price action analysis. This is the study of candlestick or bar formations on the chart and there are a variety of price action trading patterns traders can choose from. If Fibonacci retracement levels give us the area to buy or sell, then price action trading patterns can help us time when to buy or sell.

Two of the most common types of price action trading patterns are the ‘hammer’ and ‘shooting star’ patterns.

The hammer pattern, as shown above, is a bullish signal which signifies the failure of sellers to close the market at a new low and buyers surging back into the market, to close near the high.

The shooting star pattern, as shown above, is the opposite of the hammer pattern. It’s a bearish signal which signifies the failure of buyers to close the market at a new high, and sellers surging back into the market, to close near the low.

So how can we use these patterns with Fibonacci lvels? Let’s take a look at some examples! It is important to note that the following strategy has not been tested historically for its effectiveness but merely serves as a starting point for you to build upon. Traders can take this strategy one step further by experimenting with different technical tools, Fibonacci ratios and markets by learning more in the Admiral Markets Education library.

Fibonacci Forex trading strategy: Uptrend

Let’s start with a simple set of rules for when the market is in an uptrend:

  1. Identify large cycle up (X to A) and draw on Fibonacci retracement levels from the bottom of X to the top of A, using the Fibonacci indicator in the MetaTrader trading platform provided by Admiral Markets.
  2. Identify bullish price action trading pattern, such as the ‘hammer’ pattern at one of the Fibonacci retracement levels.

Both these rules are shown in the example price chart below:

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing Fibonacci retracement levels and the ‘hammer’ price action pattern, finding support at the 23.6% Fibonacci level.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

We can also add a third rule on identifying a possible target level for the trade:

  1. Use the 161.8% Fibonacci extension level as a price target level by using the Fibonacci retracement tool and measuring from the A to B cycle, as shown below:

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing the Fibonacci extension level 161.8%.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

In the example above, the price has moved higher from the ‘hammer’ price action pattern which formed at the 23.6% Fibonacci retracement level. However, it is yet to reach the 161.8% target level. While the trader may want the market to go the target level there is no guarantee it will. In fact, the market – at any time – could reverse the other way and change trend.

This is why risk management and using a stop loss will prove to be beneficial in the long run as it can help to minimise losses.

Fibonacci Forex trading strategy: Downtrend

Let’s start with a simple set of rules for when the market is in a downtrend:

  1. Identify large cycle down (X to A) and draw on Fibonacci retracement levels from the top of X to the bottom of A, using the Fibonacci indicator in the MetaTrader trading platform provided by Admiral Markets.
  2. Identify bearish price action trading pattern, such as the ‘shooting star’ pattern at one of the Fibonacci retracement levels.

Both these rules are shown in the example price chart below:

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing Fibonacci retracement levels and the ‘shooting star’ price action pattern, finding resistance at the 23.6% Fibonacci level.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

We can also add a third rule on identifying a possible target level for the trade:

  1. Use the 161.8% Fibonacci extension level as a price target level by using the Fibonacci retracement tool and measuring from the A to B cycle, as shown below:

An example of the MetaTrader 5 trading platform provided by Admiral Markets showing the Fibonacci extension level 161.8%.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

In the example above, price did indeed move lower from the ‘shooting star’ price action pattern which formed at the 23.6% Fibonacci retracement level. In this instance, the price went all the way to the 161.8% Fibonacci extension level.

Within the uptrend and downtrend Fibonacci forex trading strategy above, we used a combination of Fibonacci retracement and extension levels and price action. To learn more about different types of strategies and the tools you can add to the above then visit this article on Trading Strategies.

How to start Forex Fibonacci trading with Admiral Markets

If you’re feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admiral Markets provides the ability to trade with Forex and other asset classes, with the latest market updates and technical analysis provided for FREE!

You can start the account opening process here, or watch the video below on how to open a live trading account with Admiral Markets.

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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.

Conclusion

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.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

GENERAL RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
87% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Trading: Brokers Reviews
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: