One of the first things you should know about fibonacci retracement tool is that it is not a forex indicator. It is just a tool to measure potential price retracement levels.
You should also know that the fibonacci retracement tool works best in a trending market.
If you are using metatrader4 chart for forex trading, this is what the fibonacci retracement tool icon looks like and you will find it at the top of your mt4 trading plaftorm when you open it:
HERE’S HOW THE FIBONACCI RETRACEMENT TOOL WORKS
- when the forex market is in an uptrend (going up), as some stages along its upward movement, price will fall back down where it will find support and then bounce back up
- or when the forex market is in a downtrend (going down), at some stage, its downward movement will stop and price will rise up where it will find resistance and then fall back down.
- with fibonacci trading, you are looking for the opportunity to get into trades on these fibonacci retracement levels where price either bounces back up(in an uptrend situation) when it hits the support level which may correspond to a fibonacci support level
- or in a downtrend market, you are using the fibonacci retracement tool to get into a trade(s) at fibonacci retracement levels where it hits resistance levels (and these resistance levels correspond to the the fibonacci level)
If you are a new forex trader, you are probably wondering, how do I use a fibonacci tool? How Do I Draw A fibonacci Level?
Well the next section below will make this very easy for you to understand.
HOW TO DRAW FIBONACCI RETRACEMENT LEVELS
Here are the rules:
- first, you need to find out if the market is in an uptrend or downtrend.
- then find out the price level where the uptrend or downtrend started. In simple terms, find out the “start” of that uptrend or downtrend.
- Next thing find out the price level where the advance ended.
- Then click and activate the fibonacci tool on your mt4 trading platform and click at the start of where the trend started and drag it to where the market advance has ended. (You must click and drag).
- Then you will see fibonacci retracment levels on your charts. If you did it right,the first point as which you clicked will show 100, then 61.8, then 50, then 38.2 and 23.6 (These are default values-you can change these values to other values you prefer but I’d like to stick to the default values which is what majority of traders use anyway)
WHAT ARE THE BEST FIBONACCI RETRACEMENT LEVELS TO USE?
For me personally, I focus only on 3 levels.
- 50 &
- 61.8 fib levels.
One of the best ways of trading with fibonacci levels is to use reversal candlestick formations to confirm your trade entries when they coincide with fib levels. These generally tend to give high probability trades especially if you are trading on larger timeframes like the 4hr and the daily timeframes.
For some reason or reasons, the forex market generally tends to react around fibonacci retracement levels. As can be seen in the chart above where price fell to around 38.2 fibonacci level and went back up all the way breaking the resistance level at point 3.
So how do you apply this knowledge of fibonacci retracement levels to your trading?
Well, here’s a couple of trading ideas and techniques which you can explore:
- combine fibonacci with other forex trading strategies and systems as a form of entry confirmation. A few examples of a forex trading systems which you can combine with fibonacci trading are: floor traders trading method & trendline trading strategy (check them out)
- or you can try just being a 100% fibonacci retracement trader and take your trades entries based on fib levels you draw. Personally, I think(my opinion ok…haven’t tried anything on that yet..?) it would no be really good. But if you can combine fib trading with reversal candlestick patterns (as I’ve mentioned above), this would work out well for you I believe.