Fibonacci Retracement Strategy
Fibonacci Retracements are a popular technical analysis concept that many Forex traders use. Now-a-days it’s represented as a tool or formula found in most forex trading platforms, and can be used to spot entry and exit points when trading. The strategy we explain in this article will help you find key levels of support and resistance in most trading situations.
What is the Fibonacci Sequence?
The Fibonacci sequence originated from the Libre Abaci, written by Leonardo Pisano in 1202. Within the writings, Leonardo described the numerical series as each number being the sum of the two prior numbers (ie. 0,1,1,2,3,5,8,13,21,34, ect.) These numbers are the basis of what traders use in the market today.
How to Use Fibonacci Retracement
Jared Martinez, known as the FX Chief, first started using Fibonacci retracements in the Forex market when he learned about the formula from a stock broker. Now, you would be hard pressed to find a trader not using Fibonacci retracements in their trading.
Before you can use Fibonacci Retracement you need a clear understanding of how retracement works. Fibonacci retracement levels are generated by plotting a trendline between two extreme points and splitting the vertical space between by the key Fibonacci ratios (i.e. 23.6%, 38.2%, 61.8% and 100%.) When plotting Fibonacci points on a chart using pre-configured software, you will notice a 50% retracement. This is not a number in the Fibonacci sequence, however, it is commonly known as another important reversal point.
Also, the Golden Ratio, 1.618, is the inverse of .618 or 61.8%. This ratio is not only used in trading but can be found frequently in a number of different real-world situations.
Check out the video below to see how retracement levels are found.
Creating a Strategy Using Fibonacci Retracements
A good number of currency traders believe that to be able to identify price correlations with the use of support and resistance zones, Fibonacci retracement levels should be deployed. The ratios are based on mathematical models of the Fibonacci sequence, one that is used to speculate the degree of connections in typical market waves. There are a couple of well-known technical indicators that can be applied alongside Fibonacci levels (i.e. momentum oscillators, moving averages, candlestick patterns, trendlines and volume.)
The most common retracement levels known to traders are 38.2% and 61.8%. Following a strong bullish or bearish price action, a retracement level can be exploited to determine the degree of correlations and pullbacks along with continuation patterns. If a retracement has demonstrated to be active in defining support or resistance levels within a listed security’s historical price pattern, traders can now deploy breakout strategies if they decide on pinpointing entry-exit points.
Another strategy is entering long positions around the 50% level, while stop loss order is entered somewhat below the 61.8% level. It is possible to also deploy Fibonacci levels when placing a short order around the peak of a large move, using the Fibonacci retracement levels as take-profit marks.
Wrapping Up Fibonacci Retracements
The market moves in waves and Fibonacci levels will often mark the reversal points. Combining Fibonacci Retracements with other indicators and strategies will allow you to grow your trading confidence and winning percentage.
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