Fibonacci Forex: A Step by Step Guide

Is there a Fibonacci Forex tool to use? If you're into math at all, you know how Fibonacci is found in everything. From seashells and flowers to stock market trading, Fibonacci is there.

In this tutorial, you will learn the Fibonacci Retracement tool, and the benefits of trading with Fibonacci Retracement levels. So let’s first start by understand what retracement is and why do markets retrace.

What Is the Fibonacci Forex Retracement?

  • A Fibonacci Forex retracement, in general, is a short term price correction during an overall larger upward or downward movement. These price corrections are temporary price reversals and don't indicate a change in the direction of the larger trend. Finding and trading retracements is a method of technical analysis used for short-term trades. The main benefit of trading retracements is that they provide an opportunity to profit by entering a trade in the original direction of the trend at a better price; just before the continuation of the original move.

1. Why Do Markets Retrace?

To understand why do retracements occur let’s take an example assuming there's a large upward trend. A significant number of traders start to buy as they believe the market price will increase.

This pushes the market higher and as more traders notice the movement they start buying as well. When the movement has gained traction some traders will close their position to take profit.

This may result in a temporary sell-off and the market will pull back and the upward momentum will be suspended for some time. After this, the original forces that form the trend resume their activity.

And the price continues to rise until the trend runs out of steam once again and reverses. Knowing this aspect of Fibonacci Forex will be really helpful to you.

2. Fibonacci Retracement Tool

Fibonacci Forex retracements are all about pullbacks and rallies. But how do you know when the market will pull back or rally?

This is where the Fibonacci Retracement tool comes in. It finds the retracement levels for the you to use them for proficient entries in the direction of the trend.

So let's see how to draw and use the Fibonacci Retracement level in trading.

3. Drawing a Fibonacci Forex Retracement

To draw a Fibonacci Forex retracement, the first thing you do is find a strong upward or downward trend. Then spot the swing high and the swing low points within that trend.

A swing high is identified as the highest point and a swing low is the lowest point over a given period. Once you identify these points you need to a draw horizontal line between these points. This will give various retracement levels. 

The most important retracement levels are 38.2%, 50%, and 61.8%. The modern-day trading platforms calculate these numbers automatically for you. 

Always remember that when you draw Fibonacci Retracement in an upward trend you draw the horizontal line from the swing low to swing high. And in downtrend you draw the line from the swing high to swing low. 

Fibonacci Forex

Using Fibonacci Retracement Levels

  • There are many theories, mathematical equations, and strategies out there to try to make sense of a market that's largely speculative. However, it's widely accepted among traders that most major moves will retrace around the Fibonacci Forex levels. And more specifically around the 50% level. If the price moves beyond the 61.8% level it might be a signal that the trend direction is changing permanently. Therefore, it can be an opportunity for switching the direction of your next trade.

1. Start Trading Fibonacci Forex Levels 

To start trading using Fibonacci  retracement levels in an uptrend, you need to see whether the price finds support at 38.2% and 50% retracement levels.

A confirmation will be on when the price touches or moves below 50% level but remains above the 61.8% level. It starts moving back up towards the original uptrend.

Once you get the confirmation your ideal entry would be somewhere between 38.2% and 50% retracement levels. Your stop-loss will be below the 61.8% retracement level.

Likewise, for a downward trend, you can place your sell entry after the price finds resistance at 38.2% and 50% retracement levels. Once again the confirmation would be when the price finally starts to move below the 50% level towards its original direction.

Ideally, your sell entry would be between the 50% and 38.2% levels. While your stop loss would be above the 61.8% retracement level.

2. Uptrend Example

The below example of the EUR/JPY chart shows the efficiency of Fibonacci Forex retracement levels in an uptrend. The pair was moving higher. So the retracement is drawn from its swing low at 114.40 to the swing high at 116.48.

You can see that the price tested the 38.2% and 50% retracement levels a couple of times. It also went towards the 68.2% level but didn't break it.  

Each time the price reached near these levels it recovered. And finally after a few trading sessions the pair resumed its on-going uptrend. 

Fibonacci Forex

3. Downtrend Example

The below example of GBP/USD shows the significance of Fibonacci Forex retracement levels in a downtrend. The pair was moving lower.

Therefore, a Fibonacci retracement is drawn from a swing high at 1.3208 to a swing low at 1.2872. The pair kept trending lower until around 1.2950.

The selling pressure was eased and the pair started to recover. However the recovery remained largely contained between the 38.2% and 50% retracement levels.

Which were acting as resistance levels. After a few failed attempts to take the pair further higher, the bulls gave up. And the pair resumed its on-going downtrend.

As with any technical indicator, it is better to seek additional confirmations to support your initial analysis. It's always a good habit to wait for a clean signal to place an entry.

For instance, if you are using Fibonacci retracement levels, you can wait for a candlestick to close in the direction of on-going trend.

If it does, you can place a market order because at that point; as you have a solid reasons to believe that level will hold for you.

Fibonacci Forex

Fibonacci Forex Conclusion

A Fibonacci Forex tool can be a great way to find support along with price targets. When you're either in a trade, or looking to get into one, look at the retracement levels. They'll be a great help to any trader.

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