Practical Fibonacci Methods for Forex Trading

The Fibonacci Retracement tool is a very common tool in Forex trading, however many traders use it in the wrong way. This article is about practical Fibonacci methods that can be used on a regular basis and help you make profits as well. When trading with the Fibonacci tool, it’s best to add other technical indicators to your analysis if you want a better timing of your trades. The main reason we made this post is so that you know that you can trade without expensive indicators (which mostly are useless). This post is all about using Practical Fibonacci Methods for Forex Trading.

Many times the market can hit a Fibonacci retracement level and then do nothing or worse, it starts breaking towards the next important Fibonacci level, and that’s the reason why having a secondary complementary indicator is so vital for your trading success. The best two technical indicators to use in combination with the Fibonacci retracement tool include the MACD indicator and the Stochastic indicator.

Practical Fibonacci Methods for Forex Trading #1
Fibonacci with MACD Crossover

The Fibonacci retracement tool used in combination with the MACD indicator is the first practical strategy presented. The MACD indicator is compatible with Fibonacci retracement because it uses two moving averages that will help us spot a crossover which usually signals a change in the prevailing trend. It’s recommended to use this strategy on the lower time frames, preferably on the 5-minute chart. Without further ado, these are the trading rules of the Fibonacci with MACD crossover strategy:

• Buy Signal: First draw your Fibonacci retracement tool from the London session low to the high prior to the New York open. Wait for a pullback to the 0.618 Fib retracement level and wait for the MACD crossover to happen before buying at the market using a protective stop loss below the London low. Take profit at NY session high.
• Sell Signal: First draw your Fibonacci retracement tool from the London session high to the low prior to the New York open. Wait for a pullback to the 0.618 Fib retracement level and wait for the MACD crossover to happen before selling at the market using a protective stop loss above the London high. Take profit at NY session low.

Basically, the Fibonacci with MACD crossover strategy works under the assumption that the market is most likely to continue the trend started during the London session so in essence this is a trend-following strategy

Practical Fibonacci Methods for Forex Trading #2
Fibonacci with Stochastic Indicator

The Fibonacci retracement tool used in combination with the Stochastic indicator is another practical Fibonacci strategy that can help us identify possible trend reversals in the market. As a trader, you’re always facing difficult choices between whether the market is going to continue in the direction of the prevailing trend and a possible reversal. Without further ado, these are the trading rules of the Fibonacci with Stochastic strategy:

• Buy Signal: Buy at the market once we hit 0.618 Fibonacci extension of a 3 wave move with the Stochastic indicator being below 20 indicating oversold conditions. Take profit once the Stochastic indicator goes above 80 indicating overbought conditions. Stop Loss below the 100% Fib Expansion.
• Sell Signal: Sell at the market once we hit 0.618 Fibonacci extension of a 3 wave move with the Stochastic indicator being above 80 indicating overbought conditions. Take profit once the Stochastic indicator goes below 20 indicating oversold conditions. Stop Loss above the 100% Fib Expansion.

Practical Fibonacci Methods for Forex Trading

The reason why we only trade the 0.618 Fibonacci level is because it’s the golden ratio and it’s regarded as being the most influential number. By adding an additional indicator to the Fibonacci tool we can only increase our odds of success.

Use both these combination consistently and you will soon understand that most of the trading indicators (which are normally very expensive) serve no function except to extract money out of your pocket. You really can just rely on standard indicators that come along with your MT4 platform without having to spend any more money on other trading tools. We hope that you found our Practical Fibonacci Methods For Forex Trading useful and we hope even more that you will use these strategies in your everyday trading.