The Fibonacci strategy is an old strategy that helps traders to make informed trade decisions. This strategy works best when the market is trending. We have retracement levels such as 38%, 50%, and 68.1% and the extension levels such as 121%, 138.2%, and 161.8%.
When the Fibonacci retracement goes beyond 100% level, it becomes an extension and this implies a new trend is being formed.
Leonardo De Pisa, a famous mathematician, introduced the Fibonacci ratios and they are 0.382, 0.50, 0.786, 0.886, 1.27, 1.41, 1.618, 2.0, 2.24, 2.618, 3.14, and 3.618.
Traders apply these levels to their charts right from the start of a trend to the end in order to identify potential support and resistance levels.
Basically, the application of Fibonacci levels to the trading chart is important most especially where Moving Averages and trendlines meet or converge (price is normally expected to bounce or drop at this point).
The strategy is used by traders to identify key support and resistance levels. In the image below, buying at Fibonacci level 50% can be a good decision with the stop-loss placed few pips below 61.8%.
USDJPY DAILY CHART – 19TH JANUARY 2019 (SAT 20:85 GMT): Price closed above the strong resistance at 109.229 area. Immediate resistance is at 110.290 area where we have the 61.8% Daily Fibo level. Support is at the 109.376 area where the ascending trendline and the 50% Weekly Fibo level. The 111.200 area is where we have the convergence of moving averages.
USDJPY WEEKLY CHART – 19TH JANUARY 2019 (SAT 20:30 GMT): Weekly resistance is at the 61.8% Fibo level – at 110.611 area, and weekly support is at 109.376 area at 50% Fibo level.
USDJPY MONTHLY CHART – 19TH JANUARY 2019 (SAT 20:14 GMT): Monthly resistance is at the 50% Fibo level – at 112.367 area, and support is at 105.340 area at 23.6% Fibo level.
EURUSD DAILY CHART – 19TH JANUARY 2019 (SAT 19:50 GMT):
USDCAD DAILY CHART – 19TH JANUARY 2019 (SAT 19:38 GMT):
USDCHF DAILY CHART – 19TH JANUARY 2019 (SAT 19:27 GMT):
GBPUSD DAILY CHART – 19TH JANUARY 2019 (SAT 18:56 GMT): Price was rejected at the 1.29987 Daily resistance area. Price also closed below the 1.28765 Monthly support area and above the 1.28581 Daily support (23.6% daily Fibo level) and 1.28501 weekly support (50% weekly Fibo level). Immediate support is at the 1.27712 area where the ascending trendline converges with the 38.2 Daily Fibo level and the 50 Day EMA.
USDCAD DAILY CHART – 12TH JANUARY 2019 (SAT 22:15 GMT):
USDCAD WEEKLY CHART – 12TH JANUARY 2019 (SAT 20:56 GMT): Price was rejected at the 1.36627 weekly resistance area. Price also closed below the 1.32832 area where we have the 23.6% weekly Fibo level. Immediate support is at the 1.30501 area where the ascending trendline converges with the 38.2 weekly Fibo level.
USDCAD MONTHLY CHART – 12TH JANUARY 2019 (SAT 20:35 GMT): Monthly resistance is at the 23.6% Fibo level – at 1.34973 area.
USDCHF DAILY CHART – 12TH JANUARY 2019 (SAT 21:15 GMT): Price closed above the 50% daily Fibo level – at 0.98355. There is a cluster of Moving Averages above this level (we have the 200 EMA, 100 EMA, and 50EMA above the level). At the 0.99040 area, we have the 23.6% weekly Fibo resistance level and the 38.2% daily Fibo resistance level. Immediate support is at 0.97673 area while stronger support is at the 0.96497 area where the monthly, weekly and daily Fibo levels converge.
USDCHF WEEKLY CHART – 12TH JANUARY 2019 (SAT 20:40 GMT): Price was rejected at the 0.97673 weekly support area – 38.2 weekly Fibo level. Price also formed a pin bar on the weekly chart. Immediate resistance is at the 0.99058 area where we have the 23.6% weekly Fibo level.
USDCHF MONTHLY CHART – 12TH JANUARY 2019 (SAT 20:20 GMT): Monthly support is at the 23.6% Fibo level – at 0.96497 area.
GBPUSD DAILY CHART – 12TH JANUARY 2019 (SAT 19:54 GMT): PRICE CLOSED AT 1.28380, FEW PIPS BELOW THE STRONG RESISTANCE AREA WHERE WE HAVE THE 100 DAY EMA. THE MONTHLY RESISTANCE IS AT 23.6% FIBO LEVEL – AT 1.28765. THE WEEKLY RESISTANCE IS AT 50% FIBO LEVEL – 1.28501. THE DAILY RESISTANCE IS AT THE 88.6 FIBO LEVEL – AT 1.28661. IMMEDIATE SUPPORT IS AT 1.28138 WHERE WE HAVE THE 78.6% FIBO LEVEL. THE NEXT SUPPORT IS AT 1.2770 WHERE WE HAVE THE 50 DAY EMA.
GBPUSD WEEKLY CHART – 12TH JANUARY 2019 (SAT 19:29 GMT): PRICE IS JUST BELOW THE 1.28501 WEEKLY RESISTANCE AREA (AT THE 50% WEEKLY FIBO LEVEL) – IMMEDIATE WEEKLY SUPPORT IS AT THE 1.27467 AREA WHERE WE HAVE THE 38.2% FIBO LEVEL.
GBPUSD MONTHLY CHART – 12TH JANUARY 2019 (SAT 19:20 GMT): MONTHLY RESISTANCE IS AT THE 23.6% FIBO LEVEL – AT 1.28765 AREA.
EURUSD DAILY CHART – 12TH JANUARY 2019 (SAT 18:44 GMT): PRICE WAS REJECTED AT 1.15687 (ABOUT 30 PIPS ABOVE THE MONTHLY STRONG RESISTANCE WHICH IS AT 1.15320) WHERE WE HAVE THE 200 DAY EMA AND LOTS OF BEARS. PRICE ALSO CLOSED BELOW THE 1.14661 DAILY SUPPORT AREA WHERE WE HAVE THE 100 DAY EMA. WEEKLY SUPPORT IS AT THE 1.14434 (WHERE WE HAVE THE WEEKLY 38% FIBO SUPPORT LEVEL) WHILE THE DAILY SUPPORT IS AT THE 1.14184 AREA (WHERE WE THE 50% FIBO LEVEL AND THE 50 DAY EMA).
EURUSD MONTHLY CHART – 8TH JANUARY 2019 (MON 21:49 GMT): RESISTANCE IS AT THE 23.6% LEVEL – AT 1.15320 AREA.
EURUSD WEEKLY CHART – 8TH JANUARY 2019 (MON 21:49 GMT): RESISTANCE IS AT THE 50% FIBO LEVEL – AT 1.15103 AREA. SUPPORT IS AT THE 38.2% FIBO LEVEL – AT 1.14434
EURUSD DAILY CHART – 8TH JANUARY 2019 (MON 22:20 GMT): WEEKLY RESISTANCE IS AT 1.15103. STRONG RESISTANCE IS AT 1.15320 LEVEL (WHERE WE HAVE THE 23.6% MONTHLY FIBO LEVEL ALIGN WITH THE 78.6% DAILY FIBO LEVEL). SUPPORT IS AT THE WEEKLY 38.2% FIBO LEVEL – AT 1.14434.
In the image below, traders can sell at level 38.2% with stop-loss placed few pips above 50% Fibonacci level.
The development of candlestick reversal patterns at certain Fibonacci levels also give traders some level of confidence when it comes to the use of the Fibonacci strategy.
How Best To Draw Fibonacci Indicator on the MT4 Chart
To draw Fibonacci indicator on a chart in a downtrend price movement, the indicator grid is dragged from the top (the high of the trend) to the bottom (the low of the trend) on the largest trend on the chart.
This is dragged from the tip of the wick at the highest candle of the trend, to the lowest tip of the wick of the lowest candle on the trend.
To draw Fibonacci indicator on a chart in an uptrend price movement, the indicator grid is dragged from the bottom (the low of the trend) to the top (the high of the trend) on the largest rend on the chart.
This is dragged from the tip of the wick at the lowest candle of the trend, to the highest tip of the wick of the highest candle on the trend.
Fibonacci and Elliott Wave
Extension and retracement of price trend using Fibonacci can be combined with Elliott wave strategy to make good trading decisions. Fibonacci retracements at key levels (38.2%, 50% and 61.6%) tends to take price to extension levels (121.4%, 138.2% and 161.8%).
Fibonacci and Harmonic Pattern
Retracement and extension of price trend using Fibonacci can be combined with Harmonic Patterns to make good trading decisions. Retracements at key levels (38.2%, 50%, and 61.6%) tend to take price to extension levels (121.4%, 138.2%, and 161.8%). Examples of harmonic patterns are Bat, Gartley, Crab, Butterfly, Shark, and Cypher.
How To Use The Fibonacci Strategy
The best use of this strategy is by drawing the Fibonacci grid on the largest trend in the higher time frame. Example, weekly or daily time frame). Key support and resistance levels are then identified on the chart.
However, the same procedure is now repeated for lower time frames (for example 15 minute or 1hour time frame). Their key Fibonacci levels are also identified. Critical levels are formed at certain points where higher time frame key level aligns with lower time frame level.
The Weekly or Daily Fibonacci levels will also serve as major turning points for the 15 minute and 1-hour time frame Fibonacci levels during the trading period.
Technically, Fibonacci key level alignment with other indicators (for example, 50EMA, or 200 EMA) or trendlines helps traders to know when the price will bounce or fall.
Traders buy on a retracement at the Fibonacci support level when the price is going up. While they sell on a retracement at the Fibonacci resistance level when the price is falling.
Fibonacci key levels can be used with support and resistance levels to make good trade decisions.
How To Take Enter Buy Or Sell Trades Using The Fibonacci Strategy
Buy or sell at Fibonacci retracement level 38.2%, 50% or 61.8%. For retracement in an uptrend, traders may buy at 38.2% and stop-loss may be placed few pips below 50% level. Alternatively, traders may buy at 50% retracement level with stop-loss placed a few pips below 61.8%.
For retracement in a downtrend, traders may sell at 38.2% and stop-loss may be placed few pips above 50% level. Alternatively, traders may sell at 50% retracement level with stop-loss placed a few pips above 61.8%.
In a strong trend, retracement usual occur at the 38.% level. In a weak trend, price normally retraces at the 61.2% and 76.4% levels. A complete retracement of 100% or more will imply that the trend is over.
How To Take Profit Using The Fibonacci Strategy
Profit can be taken at the following extension levels: 121%, 138.2%, and 161.8%. These points also form good exit points for trades.
Caution: Forex trading is risky. It is advisable that you acquire enough experience before you start to trade with real money. Do not invest in money that you cannot afford to lose (it is important that you study leverage, lot size, and money management in Forex trading very well before you execute your trade decision).
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