Fibonacci Retracement Levels
Fibonacci Retracement Levels
Before we dive into Fibonacci Retracement Levels specifically for Forex trading, it would only be pertinent that we get a good idea of the concept as a whole.
In essence, Fibonacci retracement refers to prospective retracement in the price of a financial asset, i.e. the kind of support it has whereby the price does not go any lower, or the resistance that it possesses to the extent that the price does not go higher.
These areas where either support or resistance is met are typically marked by horizontal lines at specific Fibonacci levels where fundamental Fibonacci ratios such as 38.2% or 61.8% are met.
The chart below will give you a good understanding of Fibonacci retracement levels:
Who should trade Fibonacci retracement levels
The Fibonacci retracement levels trading strategy finds widespread usage across a diverse array of traders. Among them, we find the strategy to be particularly pertinent for forex traders. That is because these traders are able to rake in profits when orders need to be placed to get into the market or for stop-loss orders, with pinpoint precision, all thanks to Fibonacci retracements. This kind of precision is usually hard to find in case of other strategies – something which forex traders particularly seek out, which is why it finds so much patronage among them.
How to trade with Fibonacci retracement levels
When it comes to deploying the Fibonacci retracement levels trading strategy, you have to look at possibilities such as:
- If market retraces close around Fibonacci levels, the higher of these levels can be looked at as prospective support and resistance positions, especially if previous highs or lows before the retracement have been crossed by the market.
- You can consider buying at around the 50% mark while choosing to place a stop-loss order just before the fundamental Fibonacci ratio of 61.8%.
- A similar scenario more preemptive in nature would be to buy at the 38.2% level of retracement while going in for a stop-loss order before the 50% mark.
At the same time, you do need to be cautious on some fronts as central to your overall Fibonacci retracement levels trading strategy:
- Always keep the bigger picture in mind – A savvy forex trader always keeps the bigger picture in mind, not losing sight of the macroeconomic perspective. We say this because otherwise you risk not gauging Fibonacci retracements accurately in the direction in which there is momentum.
- Get your Fibonacci reference points correct with precision – All Fibonacci reference points need to be referred correctly with consistence. As an example, if you are looking at the lowermost price point of a trend, the corresponding highest price should be at the top of that same trend. Inaccuracies in getting these reference points correct invariably lead to mistakes.
The chart below depicts accurate Fibonacci reference points where future support and resistance levels have been accurately predicted along Points 1 and 2.
Fibonacci reference points may not be your best options for very short time periods – In case of very short time periods, say over the course of intra-day trading, Fibonacci reference points are not always likely to prove as your ideal course of action, purely due to the extreme volatility that is witnessed. Accordingly, consider longer time frames to get a more accurate picture of the situation to get your overall forex trading strategy on song.
The Fibonacci retracement levels trading strategy is ideal to get your overall forex trading strategy in place; forex traders around the world consistently rely on it for maximum rewards. At the same time, a word of caution would be to not overly rely on Fibonacci; there are other tools such as stochastic oscillators or MACD that also need to be considered, especially since they equally enhance prospects of garnering favorable trades.
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