Fibonacci Trading Strategy

In the previous article, we understood the definition of Fibonacci and how the Fibonacci levels are derived. Now we shall see how to use these levels to enter a trade and formulate a trading strategy around it. The Fibonacci lines show key levels of resistance and support.This tool is best used when the markets are trending up or down. You can find this tool when you have the cTrader platform open by looking at the charting toolbar which is usually located on the right-hand side of the chart as shown below. A Fibonacci fan refers to a technique that is used by traders who use the Fibonacci ratios to estimate resistance and support levels on a chart. Sometimes however, the predicted support and resistance levels become psychological levels and traders use Fibonacci as a tool to influence the way they trade, but not as a predictive tool at all.

fib retracement levels

In case of an uptrend, the lines should be stretched from bottom to top, and in case of a downtrend – from top to bottom. Our Trigger Trading Technology ® means you can now automatically execute your trades directly in the world’s global markets. This tool allows you to generate basic Fibonacci retracement and extension values in both up and down trends, by entering the high and low values of your choice. This is the tool of choice used to predict or technically analyse areas of resistance or support. These levels are portrayed by horizontal lines which show possible areas and where they may be. It is based on percentages and depicts how far the price will move based on prior retracements.

Using Bollinger Bands To Time The Rectangle Pattern

Taking the previous example, if we are anticipating price to resume the uptrend, we use the pullback to determine the expected targets. The information and data provided is for educational and informational purposes only. Interpretation and use of the information and data provided is at the user’s own risk. All information and data on this website is obtained from sources believed to be accurate and reliable. However, errors or omissions are possible due to human and/or mechanical error.

fib retracement levels

Once Wave 5 has ended, the market will turn around and form new wave patterns. You can make sensible price projections from price action that has already occurred. We can clearly see the price respecting the Fibonacci levels, and the trade here went exactly the way we predicted. In an uptrend, always make sure to plot the Fib levels from Swing Low to Swing High. Likewise, in a downtrend plot, the Fib levels on the chart from Swing High to Swing Low.

Fibonacci 101

The next article will cover the different situations/patterns, where we should ideally use these ratios. You can see the graphical object on the price chart by downloading one of the trading terminals offered by IFC Markets. Use the TimeToTrade Trigger Trading Technology™ to execute your trades when Price, Candle Stick, Trend Line, Volume and Technical Analysis chart conditions are met – no coding required. Our tools and calculators are developed and built to help the trading community to better understand the particulars that can affect their account balance and to help them on their overall trading. When Wave 3 is a very long wave , Waves 1 and 5 are very often equal in length.

  • 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.
  • The distance between them is calculated with the help of the Fibonacci ratio.
  • After placing Fibonacci levels on the chart, we need to wait for a retracement and see where it touches the Fib levels.
  • Now we shall see how to use these levels to enter a trade and formulate a trading strategy around it.
  • Interpretation and use of the information and data provided is at the user’s own risk.
  • The Fibonacci grid is stretched along the last apparent trend wave.

It is typically used on 1 or 4 hour time frames, although sometimes it could be applied to the daily time frame, too. The shortest time frame that one can use this is strategy on is about 15 minutes. However if the trade is based on a higher time frame, then it is a good idea to zoom in to a 5-minute chart in order to refine entry.

Uptrend

Took the code from LazyBears rsi-fib and made it so you could apply it to a chart. It plots fib levels between the high and low of a timeframe of your choosing. Not sure if it’s any better than just drawing the lines yourself, but whatever. After placing Fibonacci levels on the chart, we need to wait for a retracement and see where it touches the Fib levels. The most desirable condition is when the price bounces off after touching the 50% or 61.8% fib ratio. In the below chart, we can see the formation of a bullish candle as soon as the Red candle reaching the 61.8% level.

We are thus looking for support at the Fibonacci levels and if the pullback is held within the Fib retracements, it is an indication that price should resume the uptrend again. • They should always be plotted on pivot points (swing highs/lows). For some reason, these ratios seem to play an important role in the financial markets, just as they do in nature, and can be used to determine critical points that cause price to reverse. Price has an uncanny way of respecting Fibonacci ratios, often quite precisely. Hence one can use these to ascertain the correct technical levels. Since Fibonacci levels are supposed to be support and resistance levels then trading based on these levels is conducted in the same way as in trading strategies based on support and resistance levels.

Using The Fibonacci Ratios

The opening of a short position in case of a rebound from resistance level, when the market goes down. We’d like to send you details of our offers, courses, services, news and educational blogs by email. We’ll always treat your personal data carefully and never sell it to other companies for marketing purposes. Technical analysis forms the basis if numerous Axia trade strategies and is taught in the early part of the Axia Futures 8-week Intensive Trader ​Training. Once again, using this knowledge with your Momentum observations can give you a likely target for the end of Wave 5 (the market top or bottom!).

Fibonacci Channel

The second (i.e. profit) target would be the 161.8% extension level of BC (or sometimes the 261.8%), at which point the position should be closed. The first target is the 127.2% level of BC, at which point the stop loss would be adjusted to breakeven to eliminate risk. The entry would be based on break of point B and the objective is to ride the move towards point D – which would be a Fibonacci level, determined by the BC swing. In other words, for optimal entry signal, we need a strong move from point A to point B; a relatively quick and shallow retracement of less than 50% to point C, and then a continuation towards point D. I understand that residents of my country are not eligible to apply for an account with this FOREX.com offering, but I would like to continue.

Entry via a market or limit order allows the trader some time to determine whether or not the breakout above point B is genuine or false. If price holds above point B for say a few minutes, then the trader may wish to buy at the best available price. However the risk is that the market moves quickly towards the target without a pullback, and the trader misses the opportunity.

Fibonacci Ratios

Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. The direction of the prior trend is likely to continue once the price has retraced to any of the ratios. Fibonacci retracements are a part of the trend trading strategy that most traders observe during an uptrend.

Fibonacci Levels And Their Types

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% 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. The Fibonacci expansion is a great tool for establishing profit targets. It offers a distinct advantage over the other usual Fibonacci ratios since it does not plot levels “behind” the market, but in “front” of the market. In other words, if the market is moving up and making new highs, the standard fib retracements will draw levels BELOW the current price, but the fib expansions will draw levels ABOVE the current price.