It doesn’t matter if you trade currencies, stocks, futures, options, etc… Fibonacci retracement tool can be used in all financial markets. The first and most important thing you must know about Fibonacci is that it works best in conjunction with other trading strategies.
Forex Signals & Indicators are the best thing available to guide people about the trading at the platform. There are some important things that you need to consider at the platform. The beginners should make use of the future options with skills and intelligence to have desired results.
If you don’t know what Fibonacci retracement is or you want to learn how to use Fibonacci retracement in forex then you’re about to find out. Keep reading!
Here, in this tutorial you will learn how to use Fibonacci retracement in forex,how to plot Fibonacci on 6our charts, you will also learn when to place your stop loss when trading with Fibonacci retracement to avoid being stopped out to soon, but before we do that, let me quickly explain who is Fibonacci.
Back in the 12th century there was a man called Leonardo filius bonacci da Pisano, better known as Leonard Fibonacci. He was one of the greatest mathematicians from Italy.
He Introduced a simple series of numbers that created ratios describing the natural proportion of things in the universe. Those numbers were used in creating a Fibonacci retracement tool found on your trading platform. Traders use these numbers or levels to predict entry levels and exit/take profit levels.
I don’t want to talk about how to calculate fib numbers or how they came about because that’s not important and it will not make you money.
Fibonacci retracement levels
0.0, 23.6, 38.2, 50.0, 61.8, and 100,0
Each one of these levels have their own purpose. However, I only use 2 Fibonacci retracement levels to enter a trade: 50.0 and 61.8. I really don’t use other levels except these two levels because the price tend to respect these levels very often.
Now, I am not saying other levels are not important and they are useless but in my experience, these two levels are the most important and reliable levels.
How to plot Fibonacci retracement on a chart
Fibonacci retracement tool is located at the Line Studies toolbar at the top.
Drawing Fibonacci retracement on a MetaTrader 4 is very simple.
Before you can plot a fibonacci retracement on a chart , you must first identify the highest and lowest point on a historical chart, then click on the Fibonacci retracement icon to your chart then plot by dragging it from one swing to the next swing.
How to draw Fibonacci retracement in a downtrend
For a downtrend market, it is drawn from the swing high to swing low.
Below is a daily chart of GBP/USD . here I plotted the Fibonacci levels by clicking on the swing high and dragging the cursor to the swing low.
Now, let’s look at what happened after the swing low occurred.
From the swing low, price went up until it reached 61.8 level but fail to break it, from then price just went down.
If you placed a sell trade at 61.8 level, you would have made more than 600 pips.
How to draw Fibonacci retracement in an uptrend
In an upward trend market, it is drawn from the swing low to swing high. Below is a daily chart of CAD/JPY . Here I plotted the Fibonacci levels by clicking on the swing low and dragged the cursor to the swing high.
Now, let’s see what happened after.
In this example, cad/jpy break all the levels and continued to go down until it tested 61.8 level but failed to break it, from then the market resumed it’s uptrend. If you placed a buy trade, you would have made a lot of money.
From these two examples, you can see that price respect the 61.8 level.
How to trade Fibonacce retracement in forex trading the right way?
Most traders trade Fibonacci retracement the way I just showed you:
They draw Fibonacci retracement levels on their charts then wait for price to retrace back to these levels then immediately place a buy or sell position as soon as the price touched these levels.
This is not the best way to way to trade Fibonacci retracement because if you trade this way, you will end up with a lot of losing trades. Trading is all about probabilities. As traders, our aim is to find best trades which are most likely to go our way.
Based on my experience, Fibonacci retracement alone don’t give higher probabilities of success therefore I advice you to not trade them this way.
Fibonacci retracement works well when traded in conjunction with reversal or indecision candlesticks or any trading strategy. That’s how to use Fibonacci retracement in forex.
If you don’t know different types of candlesticks you must read this article here.
If you see a reversal or indecision candlestick forming around 50.0 or 61.8 level only then you can take a position. meaning you use candlesticks as your second confirmation.
Best timeframes to trade Fibonacci retracement
Fibonacci levels can be traded in any timeframe. However, if you want best results, focus on higher time frames like daily and weekly.
Where to place your stop loss
Its very important that you place your stop loss in the right place. You must have a stop loss that doesn’t not follow the market too closely.
The market noise can be 20-50 pips or more depending on the currency pairs you trade and if you place a stops that is too small, the market price might hit your stop before moving in you anticipated direction.
So it’s only wise to place at least 30 – 50 pips stop loss. For example, you take a buy trade at 61.8 level because you saw a reversal candle. You can place your stop loss few lips below the reversal candlestick.