Practical Fibonacci Retracement For Forex Trading

Many traders think that Fibonacci is too difficult to be applied, but don't carelessly discard it. Read this first.

Fibonacci is the name of an Italian mathematician that is known by his phenomenal Fibonacci series (1, 1, 2, 3, 5, 8, 13). The series is built on a string of numbers in which each number is the sum of the last two number in the string.  However, in forex trading, Fibonacci is based on Fibonacci ratio, that is 0,236, .50, 0,382, 0,618, etc.

In forex trading, the ratio is very important to explain random movements of prices that continue to oscillate following this ratio. The Fibonacci ratio generally describe support and resistance levels that although probably not pips-accurate, but is enough as a benchmark.

If one want to use Fibonacci ratio, he or she only has to follow these steps:

• Establish the waves to determine high-low points
• And then insert Fibonacci Retracement indicator that is available in all trading platform.
• Afterward, you could see how price movement tend to follow Fibonacci ratio as its support-resistance point.
• This will help you know the support and resistance to determine when to enter and exit the market.

Many traders think Fibonacci is too difficult to apply but don't carelessly discard it. Try it out first. These are a bit of explanations about practical Fibonacci Retracement for forex trading.

Fibonacci Retracement To Determine Take Profit (TP) and SL (Stop Loss)

The first step in using Fibonacci Retracement is to identify price swings or the recently occurred waves by determining high and low points of price movements in the mid-term timeframe. After knowing the high and low, draw Fibonacci Retracement by adjusting 0-100 Fibonacci levels accordingly. See the following example of Fibonacci Retracement on USD/JPY in H4 timeframe.

The line on the chart is the Fibonacci Retracement. It is drawn from high A at 102.790 to low B at 101.604. There are also two other lines called EMA-20 and EMA-60 in red and blue.

Let's focus on the yellow Fibonacci lines. The price tried to break a certain level but couldn't and fell even further. We can use these Fibonacci levels as targets for making a profit. In this case, we can place a sell order with a target point called TP at the 0.0 Fibonacci level, around 101.560.

To protect ourselves from any potential reversal, we can place a stop loss (SL) at the 61.8 level, around 102.350. If the price goes beyond that point, we can limit our losses.

Once the target is reached, we can look for another wave and draw a new Fibonacci Retracement. It's important to do this every time a new wave appears. It's usually better to use one hour or more, like the H4 timeframe shown here, when using Fibonacci Retracement.

Fibonacci Retracement As Pivot

There are different ways to find pivot points, and one interesting method is using Fibonacci Retracement. This technique known as Wisopivot. It involves drawing two Fibonacci Retracement lines and aligning them at the same 0.0 level.

In the example chart of EUR/JPY pair on the H4 timeframe from June 25 to July 6, 2014, Fibonacci Retracement is used as a pivot to analyze the price movement in the first week of July.

You can observe how the support and resistance levels of the price align with the Fibonacci levels that were drawn. Since the price has broken the 0.0 level, it suggests that the price can increase (go bullish).

One could consider buying with a target profit (TP) set at the 23.6 level on the upside to take advantage of this. To protect against potential losses, a stop loss (SL) could be placed at the 38.2 level on the downside.

Conclusion

After reading this article, you might think, how do we determine which support and resistance to use as benchmark for the Fibonacci Retracement? Well, that is up to you.

Some people said drawing lines on the chart needs some sixth sense, while others said you need to identify which support and resistance gave the highest impact.

Fibonacci Retracement on the two examples in this article too, is drawn according to my preference. You could make a different one.

Do a trial on a demo account to find your preferred style, and practice using it on a demo account. You will master Fibonacci Retracement at no time at all.