How to Trade Forex Using the Fibonacci Retracement

By highlighting important price points that reveal unseen support and resistance, Fibonacci analysis can enhance the performance of forex trading for both short- and long-term positions. When combined with other methods of technical analysis, Fibonacci creates a strong basis for tactics that work well in a variety of market circumstances and volatility ranges.

Leonardo de Pisa, a mathematician and monk from the 12th century, developed a number sequence that may be found in both nature and well-known artistic creations. Despite being theoretical in nature, Fibonacci numbers have useful applications in today’s financial markets because they explain the linkages between price waves within trends and the distance those waves will travel before reversing and testing earlier levels. 

The main Fibonacci structure used in charting programs consists of the retracement levels of.386,.50, and.618. The levels.214 and.786 provide further depth to market analysis. Since the 1990s, funds seeking to trap traders using technical analysis criteria have deconstructed the model, giving these secondary ratios more significance. This has led to an increase in whipsaws through primary Fibonacci levels while maintaining harmonic patterns.

For instance, in a strongly moving market, it was widely assumed that the.618 retracement would include countertrend movements. The.786 retracement provides significant support or resistance, depending on the direction of the main trend, and that level is currently frequently breached. Market timers and traders have adjusted to this gradual change, modifying tactics to account for an increased incidence of whipsaws and infractions.

Historical Analysis

Applications of the Fibonacci grid can be broadly classified into two groups: trade preparation and historical analysis. For the first category, long-term forex patterns must be examined in order to determine the harmonic levels that marked significant trend shifts. In order to develop entry and exit strategies, active market participants will devote more of their attention to the second group, where Fibonacci grids are positioned over short-term price activity.

The two apps perform very well together since price levels found through long-term historical analysis are useful for short-term trade preparation, particularly during significant turning periods. Since currency pairs fluctuate within restricted parameters in almost all economic scenarios, short-term pricing can be impacted by these previous levels for many years. 

Because there aren’t as many popular crosses as stocks or bonds, it makes sense to do a historical study on each pair, highlighting key levels and patterns that could be relevant in the upcoming years. To complete this challenge, place grids throughout secular bull and bear markets and zoom out to weekly or monthly charts. If price activity stays below the long-term grids’ highs and lows, the analysis only needs to be done once.

The EURUSD currency pair began trading around.90000 in the 1980s and reached a high of 1.42890 in 1995. It reached an all-time high of 1.60380 in 2008 after plunging to an all-time low of.82300 in 2001. All price movement over the last eight years has been documented by a grid put across the enormous uptrend. A few months later, the initial slide off the rally high finished close to the.50 retracement, which supported testing in 2010 and 2012. The currency pair spent 2015 bouncing along the.618 retracement, which served as new support for a 2014 breakdown.

Trade Preparation

To commence your trade preparation study, align a single grid across the daily chart’s main trend to pinpoint significant turning points. Next, add grids at progressively smaller intervals of time while keeping an eye out for convergence of the major harmonic levels. The power of these levels tracks relative time periods, much like trendlines and moving averages do. Grids on longer term trends set up stronger support or resistance than grids on shorter term trends.

Fibonacci levels are useful in day trading, which is the primary focus of many forex traders. Daily and weekly trends naturally split into progressively smaller proportionate waves. Stretch grids over trends on 15-minute and 60-minute charts to access these secret numbers; nevertheless, add daily levels first, as they will determine significant turning points during the 24-hour trading day in forex.

Are you having trouble determining the beginning and finishing points for your Fibonacci grids? Most of the time, stretching the grid across a big high and low is a good strategy, but many traders choose to use the first higher low or lower high following a major low instead. This method follows the Elliott Wave Theory and concentrates on a trend’s second primary wave, which is frequently its longest and most dramatic wave.

Relationships with Additional Indicators

The amount of technical variables converging at or near a retracement level is a direct indicator of how well it stops price swings and initiates successful counter swings. These can be moving averages, trendlines, gaps, previous highs and lows, and relative strength indicators reaching extremes of overbought or oversold conditions. Fibonacci retracements in other time periods can also be included.

The likelihood that the forex pair will reverse at or near a certain level is increased when numerous grids on a daily chart, for instance, line up the.618 retracement of one trend with the.386 retracement of another trend. The odds rise even more when you include a 50- or 200-bar moving average, which promotes larger positions and a more aggressive trading approach. When the price hits a retracement level that exhibits many alignments, forex traders are advised to take profits, according to this process, which also applies to exits.

In just six hours, the EUR/JPY forex pair sells off from 133.75 to 131.05, forming a vertical trend swing that is ideal for a short-side Fibonacci retracement entry. For four days, the countertrend wave plods higher until it eventually reaches the.618 selloff retracement at the exact moment the 200-bar EMA falls into the same price level, matching up perfectly. This increases the likelihood that the pair will decline in a successful short sale. The countertrend wave is lost in the ensuing fall to the tune of about 70%.

Conclusion

To your preferred currency pairs, add long-term Fibonacci grids, and keep an eye on price movement around well-liked retracement levels. As part of your daily trade preparation, add shorter term grids and use alignments to determine the optimal prices to enter and exit positions. In order to increase the likelihood that prices would reverse in profitable counter swings, add more technical indicators and search for convergence with retracement levels.

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