levels
Trading the Fibonacci levels
Introduction:
The Fibonacci levels are a very powerful tool in trading forex. They can be traded in isolation or in combination with other signals, for example candlestcks, indicators or chart patterns. In this book we wil use confirmation signals for entry and exit points.
Buy setups include bullish engulfing candlestck, morning star, tweezer bottom, double bottom and a break of the high of an inside bar. Sell setups include bearish engulfing candlestck, evening star, tweezer top, double top and a break of the low of an inside bar
The methodology wil be demonstrated using real examples using charts and explanations.
One can apply these methods on any tme frame from 5min charts through to weekly charts.
When puttng Fibonacci levels on the charts, one must look back on each tme frame for significant highs and lows. his may involve looking back days and even weeks. here are traders trading all the different
me frames so Fibonacci lnes drawn on weekly or monthly charts wil affect the market. Convergence of different Fibonacci levels may occur from levels placed on the different tme frame charts. Where convergence occurs, the levels become more significant. It is important to look for convergence with Support and Resistance Levels and Trendlines
Fibonacci Retracements
Retracement trading is safer than breakout trading .he main levels to watch are:
38.2%, 50%, 61.8% and 78.6%. (or 76.4%)
The market wil typically retrace after a strong move before continuing .The market won’t always hit these levels exactly. For example, price may reverse mid way between 50% and 61.8% sometmes. Price can under shoot or over shoot a Fibonacci level .The 61.8% and 76.4% retracements are very popular levels for the market to retrace to. Watch these levels on the different tmescales. It is best to wait for a confirmation signal at or close to point C before entering a trade. The difficult part about trading Fibonacci retracements is knowing which level wil hold.
For a buy, price should rise from a swing low at point A to a swing high at point B and retrace to
point C at a Fibonacci level. A swing low is a C bar turning point .The low of the middle bar is the lowest
point of the swing.
For a sell, price should drop from a swing high at point A to a swing low at point B and retrace up to point C. Look for intra day highs and lows, daily highs and lows, 2 day highs and lows and 3-5day highs and lows etc.
Candlestck patterns are most relable near Fibonacci levels and other support and resistance lnes. Candlestcks are also good for signaling the end of a retracement.
Double tops and double bottoms often appear at Fibonacci levels e.g. 61.8% retracement or the 1.382% extension.
Example of a Sell setup a lot more here short trades
Example of a Buy setup and a lot more >> long tardes
Fibonacci Extensions, Expansions or Projections,
Target point D (Profit Objective) and retracement pont C can be calculated by measuring the number of pips from point A to point B and multplying by the factors below:
|
Fibonacci Target |
Formula for points CorD |
|
38.2% |
(B-A) x 0.382-B = C |
|
50% |
(B-A) x 0.5 – B = C |
|
61.8% |
(B-A) x 0.618 -B = C |
|
78.6% |
(B-A) x 0.786 – B = C |
|
100% |
(B-A) x A + A=D |
|
127% |
(B-A) x 1.27+ A=D |
|
161.8% |
(B-A) x 1.618+ A = D |
|
200% |
(B-A) x B + A = D |
|
261.8% |
(B-A) x 2.618+ A=D |
Most charting software has these extensions available so calculations are not needed.
For a retracement, left click on point A, drag the lne to point B, then release the mouse. For an extension (projection), left click on point B, hold, and drag the lne to point A and release.
Commonly, 61.8% retracements go to at least the 161.8% projection. Sometmes the 100%, 200% and 261.8% extensions come into play.
A lot of money has been made using the ABCD (also called 1234) patterns using retracements to enter and extensions to exit. Enter near point C and exit at point D.
The best way to determine whether a move is a pullback (retracement) or not is to determine whether the price is moving in the direction of the main trend. If the price is moving against the main trend watch for reversals at the 38.2%, 50%, 61.8% or 78.6% Fibonacci Lines. Sometmes the price wil consoldate at one or each of the levels before continuing. Hence it is important to wait for a confirmation signal before re-entering in the reverse direction.
The chart below ilustrates this. In the move down from A the GBPUSD consoldated at B the 38.2% retracement. Note there is no reversal signal here and that the GBPUSD then continued retracing until it reached the 61.8% level. Here there is a Morning Star Candlestck Pattern and a Support lne providing a reversal signal at point C and convergence with 61.8% retracement.
Levels on 30th March
Buys
USD/CHF
Lightly buy 1.1330 and aggressively 1.1300
GBP/USD
May reverse tomorrow. Buy breakout of 1.4350 up to 1.4450 where it may stall
USD/CAD
Buy breakout of 1.2450, may stall at 1.2465
AUD/USD
Under .6943 look for shorts down to .6800
Sells
GBP/JPY
Sell 141.75 to 142.06 and 142.75
NZD/USD
Sell .5750
CAD/JPY
Sell 79.66 to 80.00
USD/JPY
Sell 99.00
EUR/USD
Sell 1.3450 and aggressively 1.3500
AUD/JPY
Lightly sell 68.31 and aggressively 68.50 to 68.59
EUR/CAD
Lightly sell 68.31 and aggressively 68.50 to 68.59
EUR/GBP
Sell .9350
NZD/JPY
Sell 56.50
EUR/JPY
Sell 131.74 to 132.27