Fibonacci Retracement Trading Strategy
Every trader in the market must take time to carefully analyze any information that is crucial to their trading, and it is at this junction that we find a lot of traders deploying technical analysis, which is a technique of assessing securities by carefully evaluating statistics that the market gives us (i.e. historical prices and volume.)
The reliance on the market’s historical performance by technical analysts, and their willingness to use them as pointers for future performance, makes technical analysts such a crucial element in Forex trading.
The Fibonacci Retracement is a very popular technical analysis concept that many traders use religiously. Now-a-days it’s represented a tool/formula found on most Forex trading platforms, and can be used to spot entry point levels when trading. The Fibonacci retracement trading strategy is a product of Fibonacci Retracement and explains levels of support and resistance – when price refuses to go lower or higher.
How to Use Fibonacci Retracement
In understanding “how to use Fibonacci Retracement” one needs a clear-cut 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%, 50%, 61.8% and 100%. )
The usefulness of Fibonacci retracements have been established in the foreign exchange market, one of such being the creation of a workable Forex retracement strategy to complement trading.
Create a Strategy Using Fibonacci Retracements
A good number of currency traders believe that to be able to identify price correlations via 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 within a Fibonacci retracement trading strategy 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, Foreign exchange traders can now deploy breakout strategies if they decide on pinpointing entry-exit points.
There are a couple of Fibonacci retracement trading strategies that retail traders adopt using Fibonacci levels. One of such is taking long positions around the 38.2% retracement level, while the stop loss order is pinned somewhat below the 50% retracement level.
Another Forex retracement 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.