The Forex Fibonacci Trading Strategy
I have sent out an email sometime ago asking my newsletter subscribers to ask questions regarding currency trading so that I can help them to know more.
I have received tons of reply emails from some of them asking about various trading methods and today post is based on one of them. In this post, I will be going through how I make use of Fibonacci in my trading and how it can benefit you as well.
In order to go into how you can make use of Fibonacci in your trading, you ought to know what exactly Fibonacci is all about.
Some Terminology you must know:
- Fibonacci numbers is a sequence of numbers like 0, 1, 1, 2, 3, 5, 8, 13…. and you will find that the number you get is always the sum of the 2 numbers before it.
- Fibonacci ratio is a golden ratio that you can find in nature all around us. It is how tree divides its branches and how the mountain is formed and many more. The most powerful ratio that is widely used in forex trading is the 0.328, 0.5 and the 0.618 levels. Usually, you will find the price respecting these levels by bouncing off them. It is not necessary for you to know the mathematical formula behind the golden ratio as your trading platform will definitely get it done for you without the need for you to know the formula.
- Fibonacci Retracement is the collapsing of price when it hits a certain level. If the price is moving in the Fibonacci patterns, you will find that it will be supported by the 0.328, 0.5 or the 0.618 levels and this is usually where you can take your trades waiting for reversal.
- Fibonacci Extension is a way of helping you to take profits. Generally, when the price retraces to the 0.328 level, the extension of the price will most probably go to 1.272 and when the price moves back to the 0.5 level, you will most probably see the price extends to the 1.272 level and then moves back a little and then continue to extend to the 1.618 level. If you see the price retraces back to the 0.618 level, you will most likely see the price moving up directly to the 1.618 level.
Since you know how the price will move, you can then make use of Fibonacci to help you to predict the price movement so that you can take your profit.
How to draw the Fibonacci level:
1) Place your cursor on a swing high
2) Drag your cursor to a swing low
3) Select the levels you want to display and you are done.
Most trading platform will be able to help you to draw the levels easily.
There are a lot of traders who are having problems with trading the Fibonacci as they do not always find the price respecting the levels. This is because those are not the Fibonacci setup and therefore do not display the patterns as discussed above.
This is how I actually trade using Fibonacci:
Step 1: Draw a Fibonacci retracement level
Step 2: Check if there is any support on the 0.328, 0.5 or 0.618 levels
Step 3: If there is no support formed on any of these levels, it is not a fib pattern. Repeat step 1 until you can find one. If there is support formed on any of the levels in step 2, you can then look for opportunity to get into a trade and then pick the extension level as your exit position.
The above is how I use Fibonacci in my trading and hope that it can benefit you as well.
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