Fibonacci trading strategy is one of the best known and most commonly used long-term technical strategies in forex. It attempts to place price action in an appropriate context using the Fibonacci sequence, a close representation of the historical “Golden Ratio”. Fibonacci numbers are not only often used in financial markets, but are also applied to physics, geometry, engineering, and the arts.
Within the arena of forex trading there are a multitude of applications of this unique mathematical construct. This particular Fibonacci trading strategy depends on a phenomenon called “withdrawal”. To fully understand how withdrawals work, we must first discuss a more fundamental concept – the trend.
A trend is simply a directed shift in price over a period of time. When looking at each price change individually, it can be a challenge to find a special pattern. However, looking at the bigger picture, the trends are easily recognizable. Observing a valid trend is a crucial part of implementing the Fibonacci trading strategy. Without the presence of a trend, this strategy is of limited effectiveness.
Demolition of the Fibonacci trading strategy
The image above shows a moderately short trend, and that’s the kind of trend we’re going to focus on when we break down this particular Fibonacci trading strategy. The trend consists of three legs: two up and one down.
Because the overall direction of the trend is upward, the middle part, where the current decline occurs, is called the “pullback”. The problem with identifying a pullback is that when we see a trend starting to reverse it is very difficult to distinguish a pullback from a trend reversal. This is where Fibonacci’s trading strategy comes into play. The technique allows us to analyze data, estimate prices and make a final decision.
To learn more about using trends to determine trades: Trend Trading – Forex Trading Strategies
Fibonacci numbers and ratios have been known among mathematicians and artists for hundreds of years. They are often found in nature and when applied to financial markets, they can function as an excellent analytical tool. No math is required to use these numbers – software trading platforms automatically perform all the necessary calculations for us. In practice, executing Fibonacci’s forex trading strategy is simple and intuitive. The only task we have to perform is to make a decision based on the lines that appear on the chart.
Application of the Fibonacci sequence
In practice, there are several Fibonacci numbers derived from a sequence. The three most important are 0.382, 0.5 and 0.618. Also, keep in mind 0.764 and 0.236 .
In the diagram above, the Fibonacci ratios are purple lines drawn horizontally. They represent 38.2%, 50.0% and 61.8% retracementations of the prevailing uptrend. Examining how far the return on the Fibonacci scale has been pulled, we can determine two things: will the price return to the bull or will it reverse into a new bearish trend. In any case, we are able to develop a trading plan for each potential scenario.
The general rule of the Fibonacci trading strategy states that, as long as the price remains above the 61.8% line, we can expect the trend to continue. This suggests that the bearish pricing process is just a pullback, not a complete reversal. On the other hand, when the price exceeds the 61.8% limit, we have to treat it as the beginning of a bearish trend. If we’ve been in this market for a long time, it’s time to close and move on to the next store.
The graph above shows the pull that forms the bottom at about 50% of the Fibonacci marker. This indicates that the price is likely to rise and the overall growth trend will continue. Consistent with this fact, we are able to properly adjust our store management. If we have been in this market for a long time, then keeping the position is the right trade management strategy. In case we are looking for a short entry, then waiting for a better place to trade shows.
In any case, the use of the Fibonacci sequence gave us a concrete framework for creating position management positions in flight. We are now able to routinely identify your ideal profit level and stop losses. With this data, we can balance risk with reward and maximize reward while limiting risk
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