Abstract:

In the material below I have tried to explain how can be used Fibonacci Retracement as an important tool to predict forex market. In this article I have included some graphic formats of Fibonacci extension/expension also with Fibonacci retracement and also rules to perfect chart plotting. I have analyzed some examples of Fibonacci retracements pattern in a downtrend and in an uptrend. In this article I have used and combine material from different sources trying to create a start point for those one of you that are interested.


Keywords:

Fibonacci ratios, downtrend, uptrend, support and resistance levels RSI-Relative Strength Index.


Who is Fibonacci?

Leonardo Bonacci – also known as Leonardo Fibonacci – was an Italian mathematician in the 12th century. He was considered the most talented Western mathematician of his time and one of the greatest of all time. Although Fibonacci himself did not come up with what is now known as the Fibonacci sequence, he certainly introduced the phenomenon to the West in his book Liber Aba.









What is the Fibonacci sequence?












Most important Fibonacci levels-

For Fibonacci Retracement (in %)
0
38.2 -Important
50
61.8 -important
78.6
100

For Fibonacci Extension (in%)
0
100
127.1 -important
141.4
161.8 -important


Why is Fibonacci analysis so popular in trading?
  1. Fibonacci levels are geometric numbers, so the retracements & extensions appear pleasing to the eye
  2. Fibonacci levels provide objective price reference points and thus remove subjectivity (when used correctly)
  3. Fibonacci retracements and extensions are among the “invisible” levels of support and resistance

Difference between Fibonacci retracements and extensions-

Fibonacci retracement levels are those that are lower than the 100% of a price swing, while extensions are those that are above 100%. Fibonacci levels are used as support or resistance, and/or for projection of profit targets.


For a UpTrend



For a DownTrend


How to plot Fibonacci levels on the chart?

1. Almost all trading platforms will have Fibonacci as part of their technical tools, so one does not have to worry about
calculating the retracement and extension levels manually.

2. All the trader has to do is identify a distinct high and a distinct low and plot the Fibonacci levels by dragging it from one extreme to the next. It is important to select the candlesticks’ wicks, so as to obtain more accurate results. They are always drawn from the left to the right:
- for an upward trending market, it is drawn from the low to the high, and
- for a downward trending market, it is drawn from the high to the low

3. Once plotted, the trading platform would automatically display the Fibonacci retracements and extensions, and also
their corresponding price levels. The Fibonacci tool is highly customizable, so one could add or remove certain levels.



Fibonacci Trading Strategy-

GOLDEN RULE- "Previous Support become Resistance and previous Resistance become Support."

UpTrend Strategy-

Move AB- We First Grab the fibbonacci Extension tool and apply it to move AB from Swing low(A) to Swing High(B). As we can see market Pulled up at the 127% Extension.




Move BC- It is the After Effect of Move AB called Retracement.& it is the previous Resistance As we know that Previous Support become Resistance and previous Resistance become Support and market is Right down at the Previous Resistance Level.

Move CD- Now we go to the move CD Grab the Fibonacci Retracement tool Plot is over move CD From Swing Low(C) to Swing High(D). it is the 38.2% Retracement. Look at the coincide of Fibonacci Extension Tool and Fibonacci Retracement Tool.



Move DE- Now ABCD Pattern is Completed Wait for the Price to reach at Point E and Let the RSI become Near Oversold.

Why Should we Enter Long at E ?

1. It is at the previous Resistancve Level.

2. Fibonacci Extension and Retracement Levels Coincide There in Other words ABCD pattern is completed.

3.. RSI(7) is oversold.




DownTrend Strategy-

Move AB- Similar to Previous Method First Grab the Fibonacci Extension tool and apply it to move AB Swing High(A) to Swing Low(B). Market Made an Extension to the down side of 127%.


Move BC-
It is the After Effect of Move AB called Retracement.& it is the previous Resistance As we know that Previous Support become Resistance and previous Resistance become Support and market is Right down at the Previous Resistance zone.


Move CD- Apply Fibonacci Retracement tool To the Move CD FROM Swing High(C) to Swing Low(D). Market again retraced 61.8% and It is the Previous Resistance Level which will become Support.





Move DE- Now ABCD Pattern is Completed Wait for the Price to reach at Point E and Let the RSI become Near Overbought.

Why Should we Enter Short at E ?

1. It is the Previous Support/Resistance level.

2. Fibonacci Extension and Retracement Levels Coincide there in Other words ABCD pattern is completed.

3. RSI(7) is Overbought.


Important points to remember :

1. Avoid News release time.

2. Don't trade without Stop-Loss and Take-Profit Target.

3. Keep Learning.


On Which Time Frame Fibonacci Works Perfect ?

You can use 1h & 4h for the best Resullt especially 1h. You can also apply it on 15M chart for scalping but do not go for Other Lower timeframes. For this reason, applying Fibonacci retracements over a short time frame is ineffective. The shorter the time frame, the less reliable the retracements levels. Volatility can, and will, skew support and resistance levels, making it very difficult for the trader to really pick and choose what levels can be traded. Not to mention the fact that in the short term, spikes and whipsaws are very common. These dynamics can make it especially difficult to place stops or take profit points as retracements can create narrow and tight confluences.

The Bottom Line

As with any specialty, it takes time and practice to become better at using Fibonacci retracements in forex trading. Don't allow yourself to become frustrated; the long-term rewards definitely outweigh the costs. Follow the simple rules of applying Fibonacci retracements and learn from these common mistakes to help you analyze profitable opportunities in the currency markets.

"Thanks For Reading. I hope you enjoyed my article. Feel free to comment. Wish you good trading and to your success!"
Translate to English Show original