Fibonacci Retracement Trading Strategy
Fibonacci retracements are a popular technical analysis concept that many traders use to identify levels of support and resistance and determining entry and exit points for trades. The strategy we explain in this article will help you find key levels of support and resistance in most trading situations.
A Brief (Very Brief) History of the Fibonacci Sequence
Before you start using fibonacci retracement to place a trade let’s take a brief history lesson of what it is and where it came from. The fibonacci sequence was discovered by Italian mathematician Leonardo Fibonacci in 1202. It describes the numerical series of each number being the sum of the two prior numbers (ie. 0,1,1,2,3,5,8,13,21,34, ect.). You can check out this post if you want to learn more about the history of the fibonacci sequence and how it correlates to the market.
Video: How to Find Fibonacci Retracement Levels
How to Use Fibonacci Retracement to Identify Support and Resistance
Now that you know what the fibonacci sequence is let’s look at exactly 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, 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.
Creating a Strategy Using Fibonacci Retracements
Now that you have an overview of what fibonacci’s are, let’s look at a couple of additional strategies that can be used to identify potential support and resistance levels.
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 a continuation pattern. If a retracement has demonstrated to be active in defining support or resistance levels within a listed currencies historical price pattern, traders can now deploy breakout strategy to pinpointing entry-exit points.
There are a couple of other strategies that retail traders adopt when using fibonacci retracement. One is taking long positions around the 38.2% retracement level, while the stop loss order is pinned somewhat below the 50% retracement level.
Another strategy is entering long positions around the 50% level, while a 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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