Fibonacci Trading Strategy 2024 Guide With Examples

If the market is trending up, the retracement levels serve as potential support levels. Thus, when a pullback reaches one of the important Fibonacci retracement levels —38.2%, 50%, or 61.8% — you should watch out for whatever defines your bullish reversal signal. Fibonacci retracement levels can be used in charts as a way to find the most opportune moment to enter a trade. The most fibonacci stop loss common way to apply this tool is to see whether the price retraces to one of the Fibonacci levels after following a steady trade. For example, if you see that after a significant increase the asset price declines 23.6% and then goes back up, it might be a good time to enter the trade. It involves the use of several horizontal lines between a high and low point of an asset price.

Fibonacci Trading Strategy Guide & Examples

Of course, the Fibonacci levels used to determine the exact location of “take-profit” are different from the retracement Fibonacci levels we used in all previous sections. HowToTrade.com helps traders of all levels learn how to trade the financial markets. It’s not financial advice and may not work in all market circumstances. However, it is https://traderoom.info/ an essential tool to have in your arsenal (we also suggest you download our Fibonacci Cheat Sheet). Moreover, many traders worldwide use Fibonacci levels, which makes these numbers even more crucial than you might think. All you have to do is identify these key levels and locate the lowest and the highest points of the previous price swing.

Key takeaways

1. Fibonacci retracements are great for many things, including the setting of stop loss levels and price targets.
2. That the price has retraced to the 50% or 61.8% Fibonacci retracement level does not mean that it would reverse and resume in the trend direction.
3. As the name implies, the extension levels are an extension of the retracement levels beyond the price swing high/low to project where the next impulse wave might end.
4. The tool is so effective that it is part of the standard settings of MetaTrader4 / 5, a trading platform that is by far the most popular and in demand.

Going the other way round, if you divide 55 by 34, you will get 1.618, which is widely regarded as the golden ratio because of its occurrence in several aspects of nature. But if you want a deeper dive into range trading, please feel free to check this article here by George. There isn’t an exact rule for that, but it is important to make sure that the Fibonacci level has some confluence with other factors in your chart. I usually like to start from a High-Time-Frame (HTF) perspective and move down to lower timeframes. I’ve seen other people use it, I’ve seen different ways of using it. There isn’t a single way of using it, so my way might not work for you.

What Are Fibonacci Retracements and Fibonacci Ratios?

The levels realised in Fibonacci retracement can be used by traders as markers for stop vs limit orders or to set price targets. Trading with Fibonacci retracements involves determining Fibonacci retracement levels by drawing a straight line from the lowest point on an asset’s price to its highest price. There are many strategies to use in combination with Fibonacci retracement lines. Basically, you can combine Fibonacci ratios with any strategy you wish to implement in the markets – swing trading strategy, day trading, scalp trading strategy, and even position trading. The other argument against Fibonacci retracement levels is that there are so many of them that the price is likely to reverse near one of them quite often. The problem is that traders struggle to know which one will be useful at any particular time.

Pros and cons of using Fibonacci retracement

Okay, you might be thinking, this is all very interesting, but what does it have to do with trading? In the 1970s, some investors thought of applying the Fibonacci sequence to the stock market. They had a theory that stock patterns might follow the natural ecosystem. So, they used the Fibonacci retracements to apply these Fibonacci numbers to their charts. It works because it allows traders to identify and place trades within powerful, long-term price trends by determining when an asset’s price is likely to switch course.

And, like other technical indicators, the Fibonacci trading tool can be applied to any time frame and any type of Forex chart. The Fib, as traders often call it, assumes the asset you are thinking of trading is in a trend, either up or down. As a tool it doesn’t provide reliable information if the market is ranging or consolidating.

And in this regard, there are several search and prediction techniques for such levels. Read about it in the article Fibonacci Retracement Definition & how to use it. Personally we are using Fibs as a trigger anytime when reviewing daily chart or higher as in those cases we are not willing to commit to a Fib trade via a pending order. Then the stops are quite large and trades take too long to develop, which means that the capital is stuck and blocking potential new setups. When analyzing a 4 hour chart or lower, traders can use Fibs as either a trigger or as an entry depending on the probability of each setup.

Let’s connect the swing high and low as a high and low point of our Fibonacci retracement levels. Hello again my friends, it’s time for another episode of “What to Trade,” this time, for the month of April. As usual, I present to you some of my most anticipated trade ideas for the month of April, according to my technical analysis style. I therefore encourage you to do your due diligence, as always, and manage your risks appropriately.

Thus, a 61.8% retracement level means 61.8% of the preceding impulse wave, and if a pullback reverses at that level, it means the pullback (retracement) was only 61.8% of the preceding impulse wave. Take profit order is slightly different because some traders prefer to close part of the trade at the closest resistance line and move the Stop Loss to breakeven. When trading with Fibonacci retracement, consider splitting your order into 2-4 equal parts and close one piece each time the price touches one of the Fibonacci levels. You may close the last part at the 0.0 level to book your profit completely. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate.

Then, you need to draw Fibonacci retracements on your chosen charting software. For downtrends, you’d click on the swing high and drag the cursor to the most recent swing low. For uptrends, you’d click on the swing low and drag the cursor to the most recent swing high. While Fibonacci retracements apply percentages to a pullback, Fibonacci extensions apply percentages to a move in the trending direction. If the price starts rallying again and goes to $16, that is an extension.

As you can see in the chart above if you had shorted the GBP/USD at the 38.2% you could have placed your stop-loss order just past the 50.0% Fibonacci level. Then, if the price breaks above the 50.0% Fibonacci retracement line, you’ll be out of the position with a minor loss. The first method is to place a stop loss right after going through Fibonacci numbers. Meaning if you planned to take a short position and enter at the 38.2% Fibonacci level, then you’d place your stop loss past the 50% Fibonacci level. If you tend to trade the same position size, you may incur large losses, especially if you enter at one of the earlier Fib levels. Setting larger stop losses would probably be best used for longer-term, swing-type trades, and you can also incorporate this into a “scaling in” method, which you will learn later on in this course.

The opposite is the case in a market that is in a downtrend — pullbacks move upwards, so the retracement levels will function as potential resistance levels. When calculating Fibonacci retracement levels, traders use so-called Fibonacci ratios. Fibonacci retracement can be used as the basis for typical strategies employed by a day trader to ensure a stable trading sequence.

The impulse waves move in the direction of the trend, while the corrective waves move in the opposite direction. As it doesn’t necessarily mean that the price will reach the levels you’re eyeing. The Fibonacci retracement levels should be used in confluence with other confirmations. There are multiple ways to incorporate Fibonacci retracement levels in your trading strategy.

Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. Proponents of the multiple timeframe strategy say this smooths out volatility.