Finding Fibonacci Retracement Levels

Fibonacci Theory

Forex Strategies by Traders Using Fibonacci Levels.

The first thing you should know about the Fibonacci tool is that it works best when the forex market is trending. The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level. The Ultimate Fibonacci Guide By Fawad Razaqzada, technical analyst at 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 .

What Are Fibonacci Retracements?

Learn how to use Fibonacci retracements as part of a forex trading strategy. Fibonacci levels are watched to identify support and resistance levels.

They are also so helpful in setting the stop loss and target orders. To use the Fibonacci numbers on the charts, you have to find the top and the bottom of the previous trend. You have to wait for the trend to become matured.

Please follow the red numbers on the below chart:. The price that started going down on 23 Nov , touched the This level worked as a support, and so the price went up as soon as it touched the level, but then went down to retest the As you know, usually when the price cannot break a support or resistance, it tries again and again and sometimes it can succeed to break out of the level.

So the price went up, but tried to test the It touched the On 31 Dec it went down to retest the On 2 Jan it failed and went up.

Currently 17 Jan it is retesting the If not, it will go up, or sideways. While going up, the price tested the From 26 Aug to 1 Oct , price went up and down between the During this period of time, the It made a consolidation around the It had a hard time in breaking the It tried for ten days from 5 to 16 Oct to break the On 31 Oct , it reached the The price went much lower after it failed to break above the On 9 Nov it broke below the As you know, consolidations including, triangles, wedges, pennants and channels are continuation patterns.

It means the price usually follows the same direction that it was following before the consolidation forms. Why do Fibonacci levels have such a strong impact on the markets. Why does the price become stopped sometimes for several days below or above the Fibonacci levels? Of course if you use the Fibonacci levels in the bigger time frames like weekly and monthly charts, you will see that sometimes the price becomes stopped by one of the Fibonacci levels for several weeks or months.

I mean whether you know the reason or not, you can use Fibonacci levels in your trades. Prices go up and down because of the behavior of traders: It depends on your trading system. You can use Fibonacci levels in all time frames. As I already explained, Fibonacci levels act as support and resistance levels. So when the price is going up and you have already taken a long position you have bought , you should be careful when the price becomes close to one of the Fibonacci levels.

It is possible that it goes down and you lose the profit you have already made. So you have to move your stop loss to the open price of the first candlestick that is touching the Fibonacci level or a little higher. It depends on the length of the candlestick. You can take a new position then.

It is the same as when the price is going down, but in this case Fibonacci levels act as support. If you get ready for all these possibilities, you will not be trapped. You have to treat the Fibonacci levels as the real support and resistance levels.

They really have no difference and sometimes the price reacts to them very strongly. Fibonacci numbers really work in forex trading because they reflect the psychology of the traders.

Trading forex or stocks is all about knowing the psychology of the traders: When most traders sell, the price goes down and when they buy, the price goes up. How can we know when traders decide to buy or sell? Fibonacci numbers are one of the tools that reflect what traders may have in their minds. They can not find the start and the stop points for plotting the Fibonacci levels. They choose the wrong points to plot the Fibonacci levels and this causes them to make mistakes.

One of the best places to plot the Fibonacci levels, is the resistance and support of the ranging markets. We can see the ranging or sideways markets on all different time frames. A range, long or short, will be broken finally because the market cannot stay in an indecision situation forever. A range can be broken down or up, and this is what we want to know to take our positions and follow the markets. If you are a Fibonacci trader, all you need is finding a range on one of the time frames and then finding the high and low of the range.

Let me show you some examples. Please follow the notes on the image below as you are reading these explanations. The distance between high and low of this range was over pips. It was still tradable but obviously the market was not trending. Almost on January , we could not guess that we are at the beginning of ranging market, but when the price went down on Then, when the price went up and made a high at 2.

On a ranging market, chart patterns like triangle, wedge or even head and shoulders can form. If the price breaks above the range, an uptrend will form, and visa versa. On the below chart, the price tested the 1.

So, this can be considered as a signal that the range would be broken down. However, we should always wait for a real breakout:. Almost all of the signs higher lows tell us that the range should be broken down. We have to wait until the breakout occurs. When the support of the range is broken, we can go short and when the resistance is broken, we can go long.

The signals indicated that the price would break below the range. Therefore, I plotted the Fibonacci levels from the low of the range to the top. Also, all other These numbers are called the Fibonacci Extensions:. Please follow the below chart. We could go short at the close of this candlestick if we were not already short after the formation of the Our target would be the The stop loss has to be placed above the open of this candlestick.

When the price breakouts out of a range, the If the breakout is strong enough, the Among the Fibonacci retracement levels or the levels that are placed between zero and , the Before this lower high, we have a smaller lower high which is formed below the Do you see how exactly and precisely the Fibonacci levels work? As you see the below image when the price reached the It is time to emphasize on the importance of On the below chart, the price goes up and retests the Again when the price broke down the Because it is a bearish candlestick that closed below the low and the close of the last 5 candles.

It also has covered the whole bodies and shadows of the last three candles and have formed a bearish pattern which is called Dark Cloud Cover. This downtrend could be traded differently as well. Then you had to wait for the price to start going up and make the first correction, flag or consolidation. Then when it started following the downtrend to go down once again, you could go short.

Take a look at the below image and you will know what I mean. I am now talking about the Elliott Waves. What I am trying to say is trading the second Elliott Wave which is the best one.

Please follow the numbers on the below chart. The below chart is the same chart above but with a different way of trading.

In many cases, a trend will be started when a range becomes broken As you saw above. As I said ranging means indecision. When we have a ranging market, it means traders are waiting for each other to take the risk.

They want the price to start moving and then take the proper position. Then after a while that the market keeps on moving, some traders decide to close their positions and collect their profit, and so the price starts moving to the other direction 2 in the above image.

But there are also a lot of other traders who keep their positions and wait for the price to start moving to the direction of the breakout again. These traders will add to their positions, and at the same time, some other traders who are late, will come and see the trend and take the proper position.

So the price starts moving to the direction of the trend again 3 in the above image. This is where most traders take their positions, because they believe that the trend is confirmed only when the price starts following the breakout direction once again. When the price starts following the breakout direction, it is the beginning of the second Elliott Wave which has the biggest movement and is the best to trade. Some professional traders only trade the second wave.

At the above image, the second wave is started at 3 and is finished at 8. Learn more about the Elliott Waves: Elliott Wave Analysis For Beginners. Fibonacci levels are the best tools to show us the waves and our entry and exit points:. Wait for the range breakout 1. Wait for the price to start moving against the breakout 2. Wait for the price to start following the breakout direction again 3 and take the proper position short position in this case and set the target to the first low support line 4 and set the stop above the 0.

Wait for the price to break below the first low support line 4. If it breaks below the first low support line 4 , but goes up to retest the broken support 5 , then close your position and wait for the price to follow the trend direction again. Wait for the price to retest the It is possible that it breaks the If you see the trend is strong enough to move toward the Your main profit could be made by trading the second wave 3 to 8 , and some traders do not take any position after that because in most cases the market becomes choppy after the second wave.

I am going to show you some examples this week. It makes sense to go long when the price breaks above the high price of the candlestick that has formed a long trade setup. But the question is where you should set the stop loss and target orders? But as you see it was stopped by A little below this levels is where you set your first target.

You can close the first position here and then move the stop loss of the other positions to breakeven when the price reaches this level. Of course, as I mentioned above, you can move the stop loss to breakeven when price reaches the In the below examples, you would be out by candlestick 2. In case of short positions it will be the opposite. Of course the long trade setup was reported when the next candlestick It strongly broke above Then it went as low as Now it has broken above the We then add 0 and 1 to get the next number in the sequence, which is 1.

You then take that value and add it to the number previous to it to get the next number in the sequence. If we continue to follow that pattern we get this:. The Fibonacci sequence is so important to this discussion because we need those numbers to get our Fibonacci ratios. With the advent of the internet, there has been a lot of misinformation on which values make up Fibonacci Ratios.

Proliferation of Fibonacci analysis, particularly in the realm of trading, has encouraged misinterpretations and misunderstandings of how and what makes a Fibonacci ratio. The math involved behind the Fibonacci ratios is rather simple.

All we have to do is take certain numbers from the Fibonacci sequence and follow a pattern of division throughout it. Notice a pattern developing here? We could do this with other numbers in the Fibonacci sequence as well.

For instance by taking a number in the sequence and dividing it by the number that precedes it, we see another constant number that develops. Another pattern develops out of the numbers of the Fibonacci sequence. Here are some more examples of patterns that develop by taking numbers in the Fibonacci sequence and dividing them in a pattern with other numbers within the sequence.

As you can see, we could get many different numbers by just taking numbers within the Fibonacci sequence and developing a divisory pattern within the sequence.

However, this is not the only way to come up with Fibonacci ratios. Once we have the numbers from dividing, we can then take the square roots of each of those numbers to get more numbers. See the chart below for some examples of those values.

The last part of making these numbers Fibonacci ratios is to simply turn them into percentages. Using that rationale 0.

1. Don't Mix Fibonacci Reference Points

Otherwise great source of informations. Please follow the red numbers on the below chart:.

Closed On:

Your charting software will do all the work for you. I cannot say which is one is always the strongest.

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