In today’s article, we will be discussing about “how to use Fibonacci in forex trading”. I remember when I first heard the world “Fibonacci” I was like “what does this mean?” I skip it, only to come back few months later to learn and understand it.
I will first explain a thing or two about Fibonacci (but if you want to get more about this i.e. the mathematical concept, then you would have to research more because I hate any math that doesn’t involve making money… lol).
What is Fibonacci?
Fibonacci or Fibonacci sequence is a series of numbers where a number is found by adding up the two numbers before it. Starting with 0 and 1, the sequence goes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so forth. Written as a rule, the expression is xn = xn-1 + xn-2.
ALSO CHECK: Understand The Mystery of Forex Trading Part II
Named after Fibonacci, also known as Leonardo of Pisa or Leonardo Pisano, Fibonacci numbers were first introduced in his Liber abaci in 1202. The son of a Pisan merchant, Fibonacci traveled widely and traded extensively. Math was incredibly important to those in the trading industry, and his passion for numbers was cultivated in his youth.
Thanks to live science for the above explanation but that’s how far I can go. Remember I said any math that does not involve making money you should count me out – so I won’t venture further into explaining the concept of Fibonacci.
I also heard that shapes of spiral galaxies and Hurricanes like hurricane Irene follow the Fibonacci sequence. So this must be a great tool, let’s see how we can improve our forex trading result.
Fibonacci in Forex Trading
Fibonacci can be used in forex trading and most trading platform has an already inbuilt tool that does the calculation for you so you don’t need to worry about calculating it manually. The popular MetaTrade 4 and MetaTrade 5 do have it preinstalled. If you are a bit confuse on how to use it you can follow the illustration from the picture below.
Go to insert -> Fibonacci -> retracement. Or you can use the short cut which I circle with a red ink.
How to use Fibonacci in Forex Trading?
I advise traders to use the Fibonacci retracement on the daily chart. This is because the daily time frame shows a clearer and more accurate picture unlike the hourly charts plus, you can see the swings, trend etc.
NOTE: A trend on the 1 hour time frame might just be as a result of series of news which can persuade traders into opening positions but on the daily time frame, everything is well detailed
The first thing you need to identify is a swing high and low like the one in the picture below.
You draw the retracement from the bottom (swing low) up to the next top (swing high)
From the picture above, you can see that we started to draw from the bottom of the swing low which has the marking (100.0) all the way to the top of the wing high which has the marking (0.0).
One of the advantages of using the Fibonacci with pure price action is that you will be able to see some key areas (zones) similarly to that of a support and resistance.
In the picture above I have clearly mark the areas with some grey boxes.
Let me share another picture
We can see the key areas which I have pointed out with grey boxes. The chart shows candle sticks from May 2017 to march 2018 which is almost a year (11 months ) and we can see how price have in a way or two respected these levels.
How does this Fibonacci retracement work?
The Fibonacci levels which are 0.0, 23.6, 38.2, 50, 61.8 and 100 (though there are some other levels but I won’t talk about those today). It is believe that once price hit these levels it will reserve.
We have seen some times where price hit those levels without reserving, and it just move straight up or down depending on the direction. Does this mean that those levels don’t work? Seem applies to the supports and resistance level, they most times break and most times do not.
ALSO CHECK OUT: Understand The Mystery of Forex Trading Part I
But in summary, the Fibonacci levels show traders which level is strong and which is weak and likely to break off. It is advisable to use a confirmatory signal like a price action tool or a technical indicator and not just trade blindly.
I would love to hear your opinions of this; do you use the Fibonacci retracement levels in your forex trading? Do you think it’s a worthless tool? please do comment below.