Fibonacci is one of the most commonly favored tools used by forex traders. Generally, long-term forex traders prefer using these types tools because the average holding period of the trades taken by Fibonacci Retracement strategies tend to be more than one day. This strategy can be extremely profitable if executed properly, and its best results tend to be seen when forex traders are using an efficiently-run PAMM account for their investments.
Fibonacci Trading Strategy
- Identify the current trend
- Note the recent Swing High and Swing Low
- Wait for price action confirmation
Fibonacci is one of the most widely used tools for identifying the retracement of a current trade. The most significant retracement areas for these tools can be found at the 38.2%, 50% and 61.8% Fibonacci retracement levels. These should be drawn from the most recent Swing Low to Swing High for an uptrend and for a downtrend it is the Swing High to the Swing Low. This can be seen in the chart below.
Figure: Fibonacci retracement level in an uptrend
Most of Fibonacci traders in forex and binary options prefer higher timeframes to trade with Fibonacci levels. In the above example, Fibonacci retracement level was drawn from the most recent swing low to swing high. Traders then wait for the market retracement back to the important Fibonacci levels. Here the market formed a reliable tweezer bottom candlestick pattern on the 50% level of the Fibonacci retracement. So it’s a buying opportunity for Fibonacci trader. Basically, the forex trader looks for price action confirmation pattern on these important levels in order to take the trade.
Stop loss and take profit
There are two ways to place a stop loss in Fibonacci trading. Those who are more concerned about their investment should put their stop loss just below the tweezer bottom or the decision-making candlestick pattern. Those who consider weekly timeframe to identify a trade can put their stop loss just below the 61.8% retracement level.
The potential profit of Fibonacci trading is extremely high. Look for a risk-reward ratio of at least 1:3 when you trade these important levels. Make sure you book half of your profit when the market shows enough momentum in the trend.