The previous two posts have been on Forex trading strategies. By now, you have learned about the Bollinger Bands, RSI, and the ADX strategies for trading Forex. Those three strategies are time-tested and so have become wildly popular with many Forex traders irrespective of the level of experience.
However, there are more that are no less effective, too. In fact, due to the complexity of the market, it is recommended that strategies are combined so that traders can identify more opportunities in the market and minimise the effects of the flaws in each strategy. By combining strategies, you are able to complement strengths and reduce faults.
Hence, here, with the Fibonacci Retracement Forex Trading Strategy we will be discussing, you will be getting your hands on one more strategy to use. So, read on.
The Fibonacci Retracement Trading Strategy
The Fibonacci Retracement Trading Strategy is a trading strategy that has its fundamental principles deeply rooted in mathematics. This is not surprising. The inventor, Leonardo Pisano, nicknamed “Fibonacci” was an Italian mathematician who was intrigued by the diverse potential applications of the Hindu-Arabic numeral system.
He popularised the Fibonacci Sequence that stipulates that after 0 and 1, each number is the sum of the previous two numbers. He was also able to apply this sequence to the context of trading. As a result, the Fibonacci Retracement Forex Trading Strategy is based on mathematical relationships inferred from the numbers in the sequence.
Fibonacci Retracement Levels.
This is the Fibonacci Sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and 377. So when you take the sequence, you will discover that each number is approximately 1.618 greater than the number that precedes it. This value is known as the Golden Ratio and has been surprisingly detected not only with numbers but also in many elements of nature.
Almost no less than they use the ratio itself, Fibonacci traders also use the inverse of the Golden Ratio, 0.618. However, to be able to successfully apply the Fibonacci Sequence in your forex signal trading, you have to know that as a Forex trader, it is not the numbers themselves that are important, but rather the mathematical relationships that can be derived from them.
In fact, the numbers in the Fibonacci Retracements which are applied in trading are not the same as the numbers in the Fibonacci Sequence. Instead, each number in the Fibonacci Retracement series is derived by dividing a number in the Fibonacci series by the number that follows it. For example, 61.80% is derived by dividing 89 by 144.
There are some modifications also. For instance, two other Fibonacci retracement levels, 38.2% and 23.6%, are calculated by dividing two Fibonacci Sequence numbers by the numbers two places and three places to the right of these two numbers respectively. So, for the first, it is 89 divided by 233 while the second is gotten by dividing 89 by 377.
Using The Fibonacci Retracement Forex Trading Strategy
So, having understood how the Fibonacci Sequence is used to calculate the mathematical relationships in the Fibonacci Retracement Series, you might already be wondering how you can really start using the series in your trading right away. Now, you will find out.
First, to be able to use those retracement levels, you need a charting software. It is with the software that you will be able to plot the grid of the most critical Fibonacci levels after you have taken the high and low points on a chart. The key Fibonacci ratios of 23.6%, 38.2%, and 61.8% are then depicted using horizontal lines.
Even though it is not regarded as a standard retracement level, the 50% level is also included in the Fibonacci grid sometimes to serve as a notable reversal level. Importantly, all the Fibonacci retracement levels are used to identify potential market reversals.
Trading The Fibonacci Retracement Levels
Traders who use the Fibonacci levels use them to trade trends. This is because they have proven highly effective in helping to find low-risk entry prices. This use is very important because it can be really difficult to identify the exact levels for retracements when markets are trending. But with them, it is easier to identify when markets reverse.
Fibonacci Retracement Levels combined with the RSI. ©MyTradingSkills.com.
Fibonacci Retracements work best when combined with candlesticks. Even though the likelihood of a reversal increases when the market gets to a Fibonacci level, the likelihood is even better confirmed when the market actually also forms reversal candlestick patterns. The predictive usefulness of Fibonacci retracements is also directly proportional to the length of time frames.
That is, the higher the time frame, the better you can predict market reversals with Fibonacci levels. The levels can also be used with other indicators and chart patterns such as trend lines, and momentum and oscillator indicators. Similarly, beyond Forex, they are also applied, with a reasonable amount of effectiveness too, to other financial instruments such as stocks and commodities.
Fibonacci Retracements have been found to be able to predict market reversals with a high level of probability. They are especially very useful for the determination of low-risk, high-potential-reward opportunities. However, they are not so simple to use. In fact, they are easier to identify in retrospect than when they are actually playing out.
Hence, the Fibonacci Retracement Forex Trading Strategy is better used as a component of a broad, more comprehensive kit of strategies, especially when used with other technical indicators. That way, you can detect some of the best Forex trading signals with them. This is what 1000pipBuilder ensures.
That is, with each of their signals, you will be getting a product of multiple, broad strategies that are applied to analyse and interpret a wide range of market conditions. As a result, their signals can always be relied upon. Hence, you should sign up to them.