Trading Techniques / Tricks

Fibonacci Trading

Leonardo Fibonacci da Pisa was a prominent mathematician and is credited with the discovery of what we now call the Fibonacci series. Those ratios appear from the next numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, ..., and according to these calculations: 1+2=3, 2+3=5, 3+5=8 etc.

The Fibonacci ratios we shall use are 0.236, 0.382, 0.500, 0.618, and 0.764. But 0.382, 0.500 and 0.618 — are the most important to watch for, and how we can use them in our day to day trading is explained below.

To set up Fibonacci on the chart we need to find out:
1. Is it uptrend or downtrend?
2. Highest and lowest swings in the chart formation (A, B points) and go with the trend!

In below example I will show you how to calculate Fibonacci Level. Below you can see a chart of the 4H GBP/USD. (I deleted some part of the picture to help you understand the concept). Now determine Point A and Point B.

Point A is 1.9213 and Point B is 1.9827.

Now Calculate difference between Point A and Point B. (i.e. B-A)

1.9827 – 1.9213 = 0.0614

Now Calculate 38.2% of 0.0614

0.0614 * 38.2 / 100 = 0.0234548

(To Calculate 50% or 61.4% just replace 38.2 with 50 or 61.4)

Now minus your answer (0.0234548) from Point B.

1.9827 – 0.0234548 = 1.9592

Here we get 38.2% retracement as 1.9592.

Similarly you can calculate for Downtrend, only difference is instead of subtracting result of 38.2% / 50% / 61.4% form Point B we ADD it to Point B.

How to I Use?

As soon as you can see that there is going to be a retracement, calculate my retracement levels and do the following.

Entry Rule: Enter at the 38.2% retracement level and place Stop Loss behind the 61.8% retracement level.

Exit Rule: Exit at Point B but if Forex market is strong then you can use formula 1:1, it means AB = CD (where D is our target), formula is calculate difference between A and B and add it to the C. For downtrend A-B+C, uptrend B-A+C.

For Stop Loss If the difference between the 38.2% and 61.8% level is too great a risk then drop down a time frame and use the same technique but get a much tighter stop.

Looking at any chart it's obvious that the best entry position would be at the lowest possible swing e.g. at 0.618 retracement level. But Forex Market Price can hit 0.382 and go straight back, sometimes it gets to 0.500,and at times even pierces deep to the 0.618 level. But still, you can determine best entry point by get an indication that the strength and momentum of the market is also in favors with our theory. For this, we could have a slow stochastic oscillator, a MACD and a RSI just as an example to give us an indication of the weight of our reentry into the trade or late entry based on the retracement idea.