How
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trades
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Free Reprint Article | Free Content to Republish | Forex Trading Using Fibonacci Retracement Zones...
Forex Trading Using Fibonacci Retracement Zones...
By: Sam Beatson
What forex day trading signals do you use to enter and exit the market?
How do you know that they are not going to give you a false entry signal?
How can you use these signals to exit your trade?
Let's look at Fibonacci first of all. This 750 year old "natural order" of numbers reflects the birth of rabbits in a field, the number of rinds on a pineapple, the sequence of sunflower seeds. So how do we apply it to forex trading?
First of all we need to understand that Fibonacci is a commonly traded forex day trading signals indicator. The ratio given by the Fibonacci numbers are converted into a percentage. The Fibonacci sequence of numbers is 1,1,2,3,5,8,13,21,34,55,133,222 etc. adding the left number to get the next number in the sequence. When we apply Fibonacci to our charts, we take a particular market move of say 50-100 points and plot the Fibonacci ratio levels.
This brings out levels of potential support and resistance on to our charts. The top of the move is considered "0%" of the move and the start of the move is considered as "100%". We then have Fibonacci "retracement" levels at 23.6%, 38.2%, 50% and 68.1%. These "retracement zones" can give us forex day trading signals.
If the price has moved down say 70 pips and then retraces we can say that the strongest Fibonacci point of resistance is at 23.6% and if the price is going to stop and reverse back to the original direction after the correction. If we break the 23.6%, then the 38.2% is the next strongest resistance level then the 50%. If we hit the 23.6% resistance line and the price "bounces" back downwards, we can start thinking about whether this was just a correction - a Fibonacci retracement.
It is not enough just to know the price has hit the line of resistance and bounced back though. We should also try to get an indication that the strength and momentum of the market is also in favour with our theory. For this, we could have a slow stochastic oscillator, a MACD and a RSI just as an example to give us an indication of the weight of our reentry into the trade or late entry based on the retracement idea.
You would be surprised at how accurate the Fibonacci method of trading is in terms of how history repeats itself again and again in the forex market. It is very tempting to exit a trade when the price turns the other way, however it is worth utilising Fibonacci to ensure it is not a minor (23.6%) retracement and allowing the trade to run it's full course.
Author Resource: Sam Beatson is "The Master Forex Trainer"
Leonardo Fibonacci discovered the sequence, which is 1,1,2,3,5,8,13,21,,34,55,89... to infinity. The sum of the two previous consecutive numbers equals the next number. The ratio of any number to its next highest number approaches .618. The ratio of alternating numbers approaches .382. Also, 1 - .618 = .382. The midpoint of .382 and .618 is .50. This is why .382, .50, and .618 are used.
Retracements
Fibonacci retracements are used in trading to determine support and resistance (and potential turning points) during a trend. Calculate the distance from the low to the high of the trend and calculate 38.2%, 50%, and 61.8% of the distance of the trend. Subtract those values from the top of the trend. Those levels should act as support and resistance and provide clues to where the market is heading next. Our Charting package includes a tool that calculates and draws the lines for you - all you have to do is connect the low of the trend with the high of the trend using the Fibonacci retracement tool.
This daily chart of the USD/CHF shows perfect retracements to the .50 and .382 levels in a downtrend.
Considering we are in a downtrend (since January) we are looking at retracements back up. If we were to take the high from 1/31/07 at 1.2572 and draw to the new low (at the time) of 1.2109 on 3/5/07, we would get the Fibonacci retracement levels as shown on the above chart.
As price moves up from the low of 1.2109, it goes to the .50 fib level at 1.2341 with a high of 1.2356. Then, it bounces off of that .50 fib level and heads lower by 325 pips to a low of 1.2031in 5 trading days!
As price recovers, it retraces back from that low of 1.2031 to the old .382 fib level of 1.2283 almost to the pip making a high at 1.2284. I say it’s the old .382 fib level because we made a new low at 1.2031 and would draw more relevant fib levels from the high to that new low. Interestingly enough, those new fib levels created a .50 fib level at 1.2299 which wasn’t too far from the new high at 1.2284. Price immediately reversed from that high of 1.2284 heading lower 140 pips the next day.
Tips for using Fibonacci
1. Follow the predominate trend and look for trading opportunities in the direction of that trend. In our example, the USD/CHF is in a clear downtrend on the daily chart. We want to look for opportunities to establish a short position when price retraces back up into one of the major Fibonacci levels (.382, .50, .618). If we were in an uptrend, we would be looking to go long when price retraced back down into these levels. This is the basis for swing style traders.
2. Use Fibonacci levels with other support and resistance tools. The Fibonacci retracement levels are powerful on their own, but when used in addition to other support and resistance measures such as pivot points, it creates very strong support and resistance and an almost guarantee of a price reversal (especially the first time that level is approached and/or hit).
3. Know the Strength of the Move- Most traders don’t have a clue about the strength of the moves, for example, going short at a resistance point when the buying is at very high levels. That Fibonacci level is most likely not going to hold at that point. We have an exclusive tool in our charting software that is called Buy/Sell Pressure and it shows the strength of the move going into the Fib level so that we know if we are trading in the face of a strong move. At the very least, find a good volume based indicator to use.
Using Fibonacci levels correctly will separate you from most amateur traders. The tips I’ve given you will allow you to use the tools effectively for maximum profit. Now, go make some money!
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