Traders use Fibonacci retracements in forex trading to pinpoint the best place for market entry orders, stop-loss orders and take profits. They are common in Forex trading because they help identify as well as trade-off support and resistance levels. The new support and resistance levels are at or near trend lines after a significant up or down movement. Hence, they help identify critical levels of support and resistance.
Fibonacci retracement levels are often calculated when the market makes a large move up or down or when it seems to flatten out at a particular price level. Traders can plot-critical Fibonacci retracement levels by drawing horizontal lines across the chart at price levels. They could be at 38.2%, 50%, and 61.8%.
These levels then help the traders identify where the market could retrace before the resumption of the overall trend created by the initial large price shift. Hence, these levels are quite important when the market has reached or approached a significant resistance level or price support.
The 50% level is included in the Fibonacci number sequence, even though it is not part of it because of the widespread market retracing experience in trading, which is often a significant move before continuing or resuming the trend.
Hence, when the market is trending up, consider going long at a retracement at the Fibonacci support level. And if the market is trending down, then go short. Fibonacci can be used as predictive technical indicators because they attempt to identify where the price could be in the future. When the price starts a new trend direction, it returns or retraces back to the previous price level and then resumes the trend’s direction.
How to Find Fibonacci Retracement Levels
To find Fibonacci retracement levels, you should find the recent crucial Swing Lows and Swing Highs. For downtrends, always click on the Swing High, then drag the cursor to the recent Swing Low. Do the opposite for uptrends.
Every trader is different, which means that strategies are also different. Hence, investors should consider how Forex strategies in trading using Fibonacci levels will fit their overall angle on the market.
For instance, you can opt to purchase near the 38.2% level with a stop-loss order strategically place below the 50% level. Or you can buy near the 50% level with the same order placed below the 61.8% level. You can also use the profit-taking target Fibonacci retracement level when entering a sell position close to the top of a large move.
You can also use higher levels of 161.8% and 261.8% if the market seems to retrace close to one of the levels it will then goes back to its prior move. This will help you identify future support and resistance levels if the market happens to move beyond the low/high that was attained before the retracement.
Extensions and Broker Tools
You can supplement your Forex trading strategy with extension levels because they also use Fibonacci patterns and numbers to determine profit taking points. Extensions tend to continue past the 100% mark to indicate possible exits in the trend line. This will come in handy if you are using Fibonacci numbers in day trading Forex. The important extension points are; 61.8%, 261.8%, and 423.6%.
Using Fibonacci strategies in Forex trading can make the formulas, numbers, and rations appear daunting. You can find advanced charting software that will help do the heavy lifting for you and give you retracement and extension level tools. Hence, we recommend using a broker with a software that you are very comfortable using.
With Forex trading, the more resources you can get your hands-on, the better. Best to explore whether a broker provides any Fibonacci forex trading strategy guidance, whether in tutorial videos or PDFs. You can also refer to YouTube to see the patterns and numbers being applied in real examples.
Using Fibonacci strategies in Forex trading relies on formulas and rations, which can help you leave your emotions at the door and focus on the patterns. However, if you are new to trading, before you start Forex trading with real money, we recommend opening a demo account and play around with Fibonacci patterns, numbers, and formulas. Always remember that Fibonacci levels can only provide an estimated entry area but not pinpoint the exact entry-level.