Learning to Use Fibonacci for Forex Trading
Fibonacci ratios are numbers with super magical formulas. Okay, let’s discuss What is Fibonacci? Immediately, Fibonacci is a big subject and there are many different studies about Fibonacci, with names that sound strange but we will stick to two things, namely: retracement and extension.
Let’s start by introducing you to fibo people themselves … Leonardo Fibonacci.
No, Leonardo Fibonacci is not a famous chef. Actually, he was a famous Italian mathematician.
He has “Aha!” When he discovered a series of simple formulas from the ratio of numbers created to describe the natural proportions of things in the universe.
The ratio arises from the following serial numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 …
The number sequence is obtained by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, add 2 + 3 to get 5, fourth number, and so on.
After the first few numbers in the sequence, if you measure the ratio of any number to the next higher number, you get 0.618. For example, 34 divided by 55 is equal to 0.618.
If you measure the ratio between alternative numbers you get 0.382. For example, 34 divided by 89 = 0.382 and it gets to the explanation as we will discuss.
This ratio is called “Golden Mean”. Okay that’s pretty nonsense. With all the numbers, you can make an elephant fall asleep. the point is, this is the ratio that you MUST know:
Fibonacci retracement level
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Level
0, 0.382, 0.618, 1,000, 1.382, 1.618
You don’t really need to know how to calculate all this. Your charting software will do all the work for you. like some indicators on MT4. However, it’s also good to be familiar with the basic theory behind indicators so that you will have the knowledge to impress your girlfriend.
Forex Traders use Fibonacci retracement levels as a potential support and resistance area. Because many forex traders pay attention to the same levels and places to buy and sell them to enter or close trades, and resistance support levels tend to be fulfilled predictions.
Forex traders use the Fibonacci extension level to take profit rates. Again, because many forex traders are watching this level, these tools tend to be used more often.
Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your chart, you must identify the Swing High and Swing Low points.
Swing Height is a candle with at least two lower highs on both the left and right sides themselves.
Swing Low is a candle with at least two lower highs on both the left and right sides themselves.
The first thing you should know about Fibonacci devices is that this works better when the market is in trend.
The idea is to buy long (or buy) on the retracement at the Fibonacci support level when the market is going up, and to sell short (or sell) on the retracement at the Fibonacci resistance level when the market is down.
In order to find a retracement level, you have to find a level that is important enough from Swings high and Swing Lows. Then, for a downtrend, click on the Swing High and drag the cursor to the latest Swing low.
For uptrends, do the opposite. Click on Swing Low and drag the cursor to the latest Swing high.
Got it? Now, let’s look at some examples of how to implement Fibonacci retracements on the market.
This is the daily chart of AUD / USD.
Here we are planning a Fibonacci retracement level by clicking Swing low at 0.6955 on April 20. Then drag the cursor to the Swing High at 0.8264 on June 3. this software can magically show a retracement level!
As you can see from the graph, the retracement levels are 0.7955 (23.6%), 0.7764 (38.2%), 0.7609 (50.0%), 0.7454 (61.8%) and 0.7263 (76.4%).
Our hope is that if AUD / USD retraces from recent highs. Now, let’s see what happens after the Swing High occurs.
Prices fell again to break the 23.6% level and continued to fall for several weeks. Even testing the level of 38.2% but cannot close the price below it.
Then, around July 14, the market again moved up and finally broke through Swing high. Obviously, buying at the 38.2% Fibonacci level will be a very profitable long-term trade!
Now, let’s see how we will use the Fibonacci retracement tool during a downtrend. Below is a 4-hour EUR / USD chart.
As you can see, we find Swing High at 1.4195 on 26 and Swing Low at 1.3854 a few days later on February 2. Retracement levels are 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4 %).
Let’s see what happens next.
oh yeah …, isn’t the chart above so beautiful?
The market did try to rally, stalling below the level of 38.2% a bit before testing the level of 50.0%. If you have some good orders at the level of 38.2% or 50%, you will be rich!
In the two examples above, we see that prices find some temporary support or resistance at Fibonacci retracement levels. Because most people use the Fibonacci tool, this level becomes self-fulfilling.
One thing to note is that prices will not always bounce from this level.
For now, there is something that must be kept in mind about using Fibonacci tools and that they are not always easy to use!
Okay, don’t think that the retracement price will reverse. Not,,!! There are times when a formula can be wrong, because we are measuring the market so there is nothing certain. The next material we will discuss about Fibonacci examples when it fails.
Fibonacci when it fails
Again remembering in the previous material, we said that support and resistance finally broke.
Now, let’s look at an example when a Fibonacci retracement tool fails.
Below is a 4-hour GBP / USD chart.
Here, you see that the pair has a downtrend, so you decide to take your Fibonacci tool.
You sell short on the market and you start dreaming that you will drive a new BMW Z3 car with soap opera stars to the top …
Now, if you really place sell orders at that level, not only will your dreams rise in smoke. But your account will receive a serious blow if you don’t manage your risk properly!
Look what happened.
It turns out that the Swing Low is the bottom of the downtrend and the market starts rallying above the Swing High point.
What lesson from this?
While the Fibonacci level gives a higher probability of success. Like other technical tools, they are not always right. You don’t know whether prices will retreat to the level of 38.2% before continuing the trend.
Sometimes it can reach 50.0% or 61.8% before turning. Oh, sometimes prices will just ignore Mr. Fibonacci and go through all levels like how LeBron James interferes with the path with full force.
Remember, the market will not always continue the uptrend after finding temporary support / resistance. Instead continue past the last Swing High or Swing Low.
Another common problem in using Fibonacci tools is determining Swing Low and High to use.
People see different graphics, see different timeframes, and have different biases. It’s possible that I and you have different ideas about the place where swing high and swing low points should be.
The point is that there is no right and absolute way to do it, especially when the trend on the chart is not very clear. Sometimes it becomes a guessing game.
That’s why you need to hone your skills and combine Fibonacci tools with other tools in your forex tool box. This will help provide possibilities with a higher success rate.
Fibonacci, Support and Resistance
As we said in the previous section, using Fibonacci levels can be very subjective. However, there are ways that can help you find opportunities to support you.
While the Fibonacci tool is very useful, it doesn’t have to be used alone.
It feels like comparing it to NBA superstar Kobe Bryant. Kobe is one of the greatest basketball players of all time, but even he can’t win their own title. He needs some backup.
Similarly, the Fibonacci tool must be used in combination with other tools. In this section, let’s take what you’ve learned so far and try to combine them.
Are you ready?
One of the best ways to use the Fibonacci tool is to see potential support and resistance levels.
If the fibo level is the level of support and resistance level, and you combine them, then the chances of bouncing prices from that area are much higher.
Let’s look at an example of how you can combine support and resistance levels with fib levels. Below is the daily chart of USD / CHF.
As you can see, the recent uptrend chart. See all green candles! You decide that you want to enter the USD / CHF train.
But the question is, “When did you enter the market?” You use the Fibonacci tool, put the swing low at 1.0132 on January 11 and swing high at 1.0899 on February 19.
Now your table looks pretty sweet with all levels of these fibs.
Now we have a framework to increase our probability of finding solid entries.
We can answer the question “Where to enter the market?”
You look back a little and you see that the price of 1.0510 is a good level of support in the past and only happens to line up with the Fib 50.0% retracement level. Now that it’s translucent, it can turn into support and be a good place to buy.
If you place a buy order around the 50.0% Fib level, you will definitely be very happy!
There will be some quite tense moments, especially on the second test of the level of support on April 1. Prices tried to break the level of support, but failed to close below it. Finally, the pair broke the last Swing high and returned the uptrend.
You can setup the same on a downtrend too. The point is you have to look for a price level that seems to have an important level zone in the past. If you think about this, there is a higher possibility that prices will bounce from this level.
First, as we discussed in class 1, support and resistance are regional levels that are good for buying or selling.
Second, because we know that many traders also use Fibonacci tools, they might be looking to jump with fib levels themselves.
With traders seeing the same support and resistance levels, there is a good chance that there is a ton of orders in one price zone.
Even though there is no guarantee that the price will bounce off that level, at least you can be more confident with your transaction.
Fibonacci and Trendlines
Another good tool to combine with Fibonacci is a trend line. After all, Fibonacci levels work well when the market is trending, so this makes perfect sense!
Remember that every time the pair is experiencing an uptrend, traders use the Fibonacci retracement level as a way to enter the market. So why not look for levels where the Fib level is in contact with the trend?
Here is the chart of AUD / JPY H1. As you can see, prices have respected the short-term trend line for several days.
You think, “Hmm, that uptrend is as sweet as I want it to be. Buy AUD / JPY, even if it’s only for short-term trading. I will buy if I touch the trend line again. ”
Before you do that, why not try using Fibonacci? Let’s see if we can get a more certain entry price.
Fibonacci retracement levels using low Swing at 82.61 and Swing Height at 83.84.
Notice how 61.8% 50.0% fibs intersect the trend line.
Can this level potentially have support? There is only one way to find out!
Look, 61.8% Fib rate, prices bounce there before going back up. If you have placed an order at that level, you will have the perfect entry!
A few hours after touching the trend line, prices that were enlarged like Astroboy, exploded past swing high.
Are you not happy you have this in your forex toolbox now?
Fibonacci and Candlestick
You can combine Fibonacci tools with support and resistance and trend lines to create super cool but simple trading strategies. But we are not finished! In this lesson, we will teach you how to combine Fibonacci tools with your knowledge of Japanese candlestick patterns.
In combining the Fibonacci tool with a candle pattern, we will look for a complete candle that can tell us when the pressure of buying or selling is exhausted. This can provide clues about when prices will continue to follow the trend.
We will call it “Fibonacci Candlesticks,” or “fib sticks” in short. Interesting enough, huh? Let’s look at an example to make this clearer.
Below is the hourly EUR / USD chart.
The pair seems to have been in a downtrend last week. Will there be an opportunity to enter this trend? You know what this means. It’s time to take the Fibonacci tool and get to work!
As you can see from the chart, we have set the Swing High at 1.3364 on March 5, with the Swing Low at 1.2523 on March 7.
Because it’s Friday, you decide to just calm down, and stop trading, and decide when you want to enter after you see the chart after the weekend.
Whoa! When you open the chart, you see that the EUR / USD has lifted slightly from Friday’s closing price.
At the Fib level of 50.0%, the buyer finally lifts the price higher. You decide to wait and see if the 61.8% Fib level will hold back. After that, the last candle is quite bullish! Who knows, prices will continue to rise!
A long legged doji has been formed
Well, will you see that? A long legged doji has formed and returned to the 61.8% Fib level. If you look at class 2, you will know that this is a “reversal”. Is it time to sell? You can never know for sure (that’s why risk management is very important), but the possibility of a reversal looks very possible!
Right after the doji is formed, the price stops briefly before heading straight down. Look at all those red candles!
It seems that buyers are indeed quite tired, which allows sellers to jump into the market and take control. Finally, the price falls back to Low Swing around 500 pips! !
Another nice thing about fib sticks is that you don’t need to be limited to fib levels.
You can use your knowledge of candlestick formations.
You can wait for the fib stick to form just below or above the fib level to provide further confirmation about whether you should order.
The next Fibonacci usage will be used to determine the target …
Always remember when we are trading – “If in doubt, know when we have to go out!”
Let’s start with an example in an uptrend.
In an uptrend, the idea is to take advantage of BUY on the Fibonacci price extension / extension. You determine the level of the Fibonacci extension using three mouse clicks.
First, click on significant Swing Low, then drag your cursor and click on the latest Swing High. Finally, pull your cursor back and click on one of the retracement levels.
This will display each of the Extension Price levels that indicate a good ratio and the appropriate price level. Pretty neat, huh?
Let’s go back to the example with the USD / CHF chart we showed you in the previous lesson.
The 50.0% Fib level was held strong as support and, after three tests, the currency pair finally resumed its uptrend.
In the table above, you can even see price increases past the previous Swing High.
Let’s use the Fibonacci extension to see which will be a good place to take profit.
Here’s a recap of what happened after the retracement Swing Low happened:
- Prices rallied to the 61.8% level, which moved at the previous Swing High.
- It fell back to the level of 38.2%, where it found support
- The price then finds resistance at the level of 100%.
- A few days later, prices rallied again before finding resistance at the level of 161.8%.
As you can see from that example, the levels of 61.8%, 100% and 161.8% are good places to take advantage.
Now, let’s look at an example using the Fibonacci extension level in the downtrend.
Let’s look at the one-hour EUR / USD chart that we showed in the Fib stick lesson.
A doji formed just below the 61.8% Fib level
Here, we see a doji formed just below the 61.8% Fib level. The price then flips back to Swing low.
Let’s put on the Fib Extension tool to see where is a good place to take advantage.
This is what happens after the return price of Fibonacci retracement levels:
Prices find support at the level of 38.2%
Level of 50.0% as initial support
The 61.8% level also became a support area, before prices fell to test the previous Swing Low
If you look ahead, you will find that the 100% extension level also acts as support
We can take advantage of the rate, 38.2% 50.0%, or 61.8%. All levels act as support, perhaps because other traders oversee this level for profit taking too.
Examples illustrate prices that find at least some temporary support or obstacles at the Fibonacci extension level – not always. But it’s often enough to properly adjust your position to take advantage and manage your risk.
You must use your wisdom in using the Fibonacci extension tools. You have to assess how much longer the trend will continue. Then, we will teach you methods to help you determine the strength of a trend.
Conclusions of Fibonacci
Fibonacci levels to consider are 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. and the most important is 38.2%, 50.0% and 61.8%.
Forex Traders use Fibonacci retracement levels as potential Support and Resistance. Because many tarders keep an eye on the same level for buy and sell, Fibonacci can be a fulfilled forecast.
The Fibonacci Extension levels are 38.2%, 50.0%, 61.8%, 100%, 138.2% and 161.8%.
Forex Traders use Fibonacci extension levels as potential support and resistance to set profit targets.
In order to apply Fibonacci levels to your chart, you must identify the Swing High and Swing Low points.
Swing high is a candle with at least two peaks lower on both the left and right sides.
Swing low is a candle with at least a higher low point on both the left and right sides.
The probability of success can increase when using a fib tool with other support and resistance levels, trend lines, and candle patterns for orders and stop losses.