You have probably heard about Fibonacci before and that it can be used in trading. I have been hearing about it myself, but I never realized until a short time ago what a magical tool it could be, if used correctly. Now I will show you how it works.
The first set of Fibonacci ratios is used as price retracement levels in trading as possible support and resistance levels.
Price Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764, 0.86
Price Extension Levels
0, 1.27, 0.382, 0.618, 1.000, 1.27, 1.382, 1.618
In an downtrend, the general idea is to go short at a retracement to a Fibonacci support level. But how does it work? Let’s take a look at some examples.
The first one is AUD/USD daily chart. Metatrader has a great Fibonacci tool. As you can see, after AB there is a 50 percent Fibonacci retracement (C) and from there it goes straight to the 1.27 extension.
But it works on smaller time frames, too. You can scalp on 15 min or 1 hr chart. It works magically on spikes that occur after announcements.
The strategy is simple (but not necessarily easy).
1. You idenify an AB spike, then
2. You pull out your Fibonacci tool, draw the retracement levels
3. wait for the pair to retrace to 0.61, 0.78 or 0.86, these are the highest probability trades
4. Then wait for a reversal candle with stochastic in the appropriate buy or sell zone.
Here is another example, AUD/USD 15 min chart:
You can clearly see the bounce from the .618 level.
Why don’t you pull out some charts on your Metatrader and experiment a little bit. Leave your notes below!
In this system we use the 10 and 20 period moving averages.
Step 1: Waiting for the MA to become sloped and parralel. This is a sign that the trend is strong. A sloped moving average means that the trend is strong and therefore any retracement will probably lead to a continuation in price, and a good trading signal for us to trade.
Step 2: Wait for price to touch the MA area and reverse. This could be from the area between the two moving averages or from either of the lines.
Wait for a reversal candle.
Step 3: Stop loss is placed
• 5 pips below the lowest low of last 4 candles (for long trades)
• 5 pips above the highest high of last 4 candles (for short trades)
Step 4: Exiting the Trade
The trade is closed when the moving average is no longer sloped = is flat.
Here is an example, GBP/USD, 15 minute chart the red (10MA) and blue (20MA) lines: