Fibonacci analysis in forex trading

This logic brought a whole variety of methods to analyze the market as well as a wide spread of supportive tools. Technical analysis is both effective and approachable, since virtually anyone can find a way to use it in their trades. The fundamental analysis, on the other hand, requires large amounts of training and preparation. It is best to focus on the technical aspects at first and leave the fundamental analytics to professionals.

Forex market technical analysis focuses primarily on the charts themselves. By looking at the trends, the patterns and comparing the data from the current market with the data from the past, traders are able to figure out an action plan for their upcoming trades, calculate the possible outcomes and implement the appropriate risk management techniques.

As we have already discussed, there are a lot of strategies when it comes to technical analysis, but the main goal for all of them is to determine the points on the chart where the price will change its direction. Chart Analysis on Forex Currency price values do not move in straight lines. If you look closely at any chart you will see that the movement of the price is shaky, as if someone kept pulling it in the opposite directions.

However, disregarding those miniature moves, there is always a certain direction of the price movement, which can be observed from a more distant view. Those directions are referred to as trends, and they appear when the majority of traders decide to act in a similar way. The trends can be short and long, easy to predict and completely random. And the job of any technical market analyst is to find a way to determine how long a certain trend will last.

To make this task easier, traders use technical indicators - add-ons to the trading platform, designed to discover, confirm and predict the trends. The indicators focus on the factors such as volatility, volume, past market data and mathematical rules, such as Fibonacci sequence. The indicated data is then used to plan the trading process. This will include the steps, like: establishing the size of the trade, planning the moments for entry and exit, taking safety measures in case the situation gets out of hand and actually placing a trade.

The entries, exits and risk management techniques largely depend on the price reversal points - virtual spot at the chart, where the price movement will change direction. The locations of the potential reversal spots are usually marked with horizontal lines across the entire chart, referred to as support and resistance levels.

If the price hits the support level it is supposed to bounce up and if it hits the level of resistance bounce down. In the scenarios, where the price continues moving past the pre-established levels, the appropriate measures need to be taken, including the calculation of new level coordinates.

And this is where the math comes in. Over the years, traders have proved that the important trading elements, such as support and resistance can be calculated through application of certain mathematical rules. Next, we are going to get into the technicalities of the calculation process that you can later use as part of your trading process. Fibonacci Retracement Levels Retracement is the process of price moving in the opposite direction from the trend, usually for a short period of time. This is done by calculating the retracement levels, using the points on the chart where the price has bounces as the starting points.

In Fibonacci methods the calculation of the retracement levels is based on the previous move of the market. A trader would measure the size of the previous swing and then apply one of the Fibonacci ratios to calculate the size of the next retracement.

The Fibonacci ratios include the following: By physically drawing these levels on the chart you can predict the potential points of retracement and reversal. There are also three other levels that are not calculated from the numbers within the sequence. It marks the point where the previous trend has started. Using these six ratios to determine the points of entry and exit is very common, however they are mostly used to mark the entry points.

One thing to keep in mind is that although the ratios will always stay the same, their exact locations on the chart will differ based on the specific data, expressed on the chart. This means that traders need to use calculation tools or perform manual calculation each time they wish to use Fibonacci retracement ratios as a part of their trading strategy.

Fibonacci Projections or Extension Levels Apart from the retracement and reversal, traders also want to know exactly how long the retracement is going to last. The Fibonacci projections, also referred to as extension levels, are used in the scenario when the price movement surpasses the pre-established support and resistance levels and continues on moving. In those cases traders believe that the reversal or a small retracement will take place at one of the following points: For example, 89 divided by These can be used as additional potential levels of support and resistance.

The practice shows that the reversal nearly always correlates with these level percentages, giving enough ground for technical analysts to base their strategies. While the retracements levels often help to determine the entering point, Fibonacci projections are used to plan the exits. Knowing where your trade will stop is equally important to planning all the moves beforehand and entering the trading process, as it is the exit that allows us to evaluate the ultimate success of any move.

The Fibonacci Fans Method Less popular than the previous two, the Fibonacci fans analytical method focuses around building diagonal lines on the chart to outline the potential levels of support and resistance. To create a Fibonacci fan, go through the following steps: Choose a start-point trend you will use to build a fan from and mark its beginning and end Add three horizontal lines at the This type of implementing Fibonacci sequence in trading is mostly used by long term traders, who want to see a bigger picture starting from an existing trend.

Before we go further, it is important to note that all of the above Fibonacci methods, including the retracements, the projections and the fans have to be calculated in relation to a trend. Depending on whether the price is moving upwards or downwards, all of the above will be calculated and drawn accordingly. And then based on your overall trading strategy, you will use the pre-indicated levels for placing your trades and planning your upcoming moves.

More specifically we are going to discuss what tools and software can be used for successful trading with Fibonacci methods. Fibonacci in MT4 The center base for all trading related tools is, of course, a trading platform. Choosing a comfortable to use and effective platform is the foundation of fruitful Forex trading experiences.

For the purposes of keeping this post to the point, we will not go into all the characteristics of a good trading platform. But just as a brief overview, the right trading platform has to possess these three qualities: User-friendly interface. The currency trading itself is a complex matter with many steps to it.

However, this does not mean that the tools used in the process need to be complicated as well. Even the most highly functioning and sophisticated platform has to be easy to read and comprehend for all categories of traders.

And it is also important to have an option to sort out and customize the platform features to your liking to make the analysis and trading as fast and as simple as possible. A variety of functions. Despite the common misconception, the most type spent during trading is not actually trading. Analysis is a very large part of pretty much every move a trader makes. If you do not agree with this statement, go ahead and put in random parameters on your next trade and see where it takes you. Thought-through analysis almost always guaranteed a better outcome and having a selection of supporting tools can be extremely important during this process.

We have already briefly mentioned the technical analysis indicators, the additional algorithms built into the platform that calculate a variety of values to identify, confirm and predict trends on the chart. On top of that, there are multiple drawing tools that help traders better visualize their strategy, by marking certain price corridors as well as calculating levels of support and resistance.

We will discuss them a bit later on. It goes without saying that a piece of software, designed to instantaneously accommodate thousands of traders and perform equally well around the clock, must be very expensive to create. However, the level of sophistication of the computer program should not really concern the majority of users as they come to the Forex market to make money, not to spend it.

Most trustworthy brokers came up with the most optimal solution - they purchase the original version of the trading platform software along with a right to share access to it. This way, by signing up with the right broker, we can also get access to the most modern and effective trading platforms at no charge. Additionally, the broker would normally also take care of the familiarization process by providing handy studying materials on how to install and use the platform.

Based on the above criteria as well as a few others, we became faithful supporters of the Metatrader 4 trading platform. MT4 combines complex algorithms with user-friendly design effortlessly and makes online currency trading accessible to absolutely anyone, no matter what their level of computer knowledge is. Additional good news for the Metatrader 4 users, is that many calculation methods have been built into the system and in most cases do not need to be additionally installed.

The pre-established selection of Fibonacci tools will allow you to effortlessly achieve the necessary results with just a few clicks. Next we are going to discuss such tools in more detail and learn how to set Fibonacci in MT4. How to Set Fibonacci in Mt4 We have already established that Fibonacci levels can be manually calculated and added to the chart using the drawing tools. This is a good option for those, who are just starting to trade using the Fibonacci trading system.

Manually calculating the ratios and adding the elements to the chart can be a very good learning instrument. For example, it was commonly believed the. That level is now routinely violated, with the. Traders and market timers have adapted to this slow evolution, altering strategies to accommodate a higher frequency of whipsaws and violations. Historical Analysis Fibonacci grid applications can be roughly divided into two categories, historical analysis and trade preparation.

The first category requires an examination of long-term forex trends, identifying harmonic levels that triggered major trend changes. Active market players will spend more time focused on the second category, in which Fibonacci grids are placed over short term price action to build entry and exit strategies. Since currency pairs oscillate between contained boundaries through nearly all economic conditions , these historical levels can impact short-term pricing for decades.

Given the small number of popular crosses compared to the stocks or bonds, it makes sense to perform a historical analysis on each pair, outlining primary trends and levels that might come into play in coming years. Perform this task by zooming out to weekly or monthly charts, and placing grids across secular bull and bear markets.

It fell to an all-time low at. A grid placed over the massive uptrend has captured all price action in the last eight years. The initial decline off the rally high ended near the. Meanwhile, a breakdown found new support at the. Trade Preparation Start your trade preparation analysis by placing a single grid across the largest trend on the daily chart , identifying key turning points.

Next, add grids at shorter and shorter time intervals, looking for convergence between key harmonic levels. Similar to trendlines and moving averages , the power of these levels tracks relative time frame, with grids on longer term trends setting up stronger support or resistance than grids on shorter term trends. Many forex traders focus on day trading , and Fibonacci levels work in this venue because daily, and weekly trends tend to subdivide naturally into smaller and smaller proportional waves.

Having a hard time figuring out where to place starting and ending points for Fibonacci grids? Stretching the grid across a major high and low works well in most cases but many traders take a different approach, using the first lower high after a major high or first higher low after a major low.

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When the chart is ranging, the price usually does not respect the Fibonacci levels. In that case, price action usually goes to the previous tops and bottoms and using the Fibonacci Forex trading tool has no advantage. Place On Impulse Or Candle Besides the presence of a trend, the Fibonacci levels are best placed on a strong and impulsive price swing: Corrective price action is indicating indecision and is not the best for using a Fibonacci level.

A clear impulsive price swing is usually a good sign that price action will respect the Fibonacci levels of that swing. Another way to use the Fibs is by placing the Fib tools on a strong candle. Usually, candlesticks of a higher time frame are more valuable. Fibs can also be placed on strong impulsive price swings against the trend as a larger correction often takes place. Place The Fibonacci Forex Trading Tool Correctly This means placing it from the left of the chart to the right side of the chart some traders prefer the other way around but most use this technique : In an uptrend, place the Fibonacci tool in Forex trading from left to right, from bottom to top.

In a downtrend, place the Fibonacci tool in Forex trading from left to right, from top to bottom. This way, the Fibonacci targets are placed on the correct side: on top for uptrend and at the bottom for downtrend. Great Match With Price Swings And Elliott Waves The more you know about price swing and Elliott Waves, the better you become at placing the Fibonacci Forex trading tool: Price swings are the key ingredient for placing Fibs and understanding price waves.

That is also why most wave traders use Fibonacci. Fibonacci and waves go hand in hand. Both tools compliment each other very well. In any case, it helps a lot if traders do not place the Fibonacci Forex trading tool on a very small or very large piece of the chart. Try to focus the Fibonacci on a price swing that makes visual sense. By the way, interested in seeing the price level of every Fibonacci level shown on these charts? A simple pro tip is this: add a space, percentage sign, and then USD sign to see the price levels behind the Fibonacci levels see image below.

The Fibonacci tool in Forex trading is an excellent method for finding entries and exits. But of course, the trading accuracy does increase when traders use it in confluence with other tools and indicators. That is why it is key to use other support and resistance levels for identifying strong POC zones point of confluence , besides spotting the trend and an impulse as mentioned in the paragraph above.

There are multiple ways of finding trade setups with the Fibonacci tool when trading Forex and CFD markets. Trading At The Fibonacci Level Directly Traders can use pending orders at the Fibonacci levels or use market orders once the price has reached the Fibonacci zone. This style offers potentially the best entry but it is often the riskiest too.

Price action can also break the Fibonacci level against the direction of the trade. This direct entry at the Fibonacci level is best used if there is a lot of confluence at a particular support and resistance zone. Candlestick patterns at the Fibonacci level for instance could be one way of trading close to the Fib.

This style offers potentially the second-best entry level but it is less risky. Because traders can already see that price action is responding to the Fibonacci level and hence there is more evidence that a setup could work. This style offers potentially the worst entry-level but it is the least risky. Because traders have a better chance that the trend is about to restart after the breakout.

This breakout entry at the Fibonacci level is best used when the counter-trend price movement is very strong. We explained the following aspects of Fibonacci trading: We reviewed the Fibonacci sequence numbers and explained how they are calculated and used. Based on those Fibonacci sequence levels, we showed how Fibonacci ratios were calculated.

We tried to offer a practical Fibonacci tool trading definition. Another important aspect is how traders can draw the Fibonacci tool on the chart. Lastly, we discussed how traders can use the Fibonacci Forex trading tool for entry and exit. Traders do that by choosing the start and end spot, which is usually placed on a price swing, candlestick, or candle pattern. The Fibonacci levels indicate support and resistance level.

They also can offer potential spots for entry and exit. Traders are interested in these entry levels because they indicate a retracement and discount within the trend. Drawing a Fibonacci Forex Retracement To draw a Fibonacci Forex retracement, the first thing you do is find a strong upward or downward trend. Then spot the swing high and the swing low points within that trend.

A swing high is identified as the highest point and a swing low is the lowest point over a given period. Once you identify these points you need to a draw horizontal line between these points. This will give various retracement levels. The most important retracement levels are The modern-day trading platforms calculate these numbers automatically for you. Always remember that when you draw Fibonacci Retracement in an upward trend you draw the horizontal line from the swing low to swing high.

And in downtrend you draw the line from the swing high to swing low. If the price moves beyond the Therefore, it can be an opportunity for switching the direction of your next trade. Start Trading Fibonacci Forex Levels To start trading using Fibonacci retracement levels in an uptrend, you need to see whether the price finds support at It starts moving back up towards the original uptrend.

Once you get the confirmation your ideal entry would be somewhere between Your stop-loss will be below the Likewise, for a downward trend, you can place your sell entry after the price finds resistance at While your stop loss would be above the The pair was moving higher. So the retracement is drawn from its swing low at You can see that the price tested the It also went towards the Each time the price reached near these levels it recovered.

And finally after a few trading sessions the pair resumed its on-going uptrend. The pair was moving lower. Therefore, a Fibonacci retracement is drawn from a swing high at 1. The pair kept trending lower until around 1. The selling pressure was eased and the pair started to recover.