Fibonacci is an extremely popular tool used among analysts of financial markets. The concept of the Fibonacci indicator is to measure price and determine points from which the market will react and start buying or selling. This is considered one of the more reliable tools for Forex trading. However, it’s not 100% accurate and it certainly does not work every time.
This post will detail how I like to use Fibonacci in my trading when I am looking to the charts for a more technical approach. Fibonacci also fits in very neatly with my earlier posts in this series, and we will see exactly how all of these trading concepts come together in the final upcoming post.
Fibonacci retracement is used by traders to figure out where they will enter the market in the direction of the overall move. In practice, the trade works a little something like this:
The market moves up 100 pips, and then stalls as traders stop entering new positions. Some of those traders that got in the original move now want to take their profits. This pushes the price back down a certain percentage of that original 100 pip move. The Fibonacci tool helps to identify specific Fibonacci retracement percentages and enter the market in the direction of the original move.
There are several levels that you can use, but the ones I prefer are the 50%, 61.8% and the 78.6% levels. These offer a good probability of success when used correctly.
This does not mean that you should trade every single move that occurs in the markets; doing that would actually result in you losing money. Instead, you need to carefully select which individual move you trade based on a number of factors. This includes looking at the fundamental outlook at the time.
Over four posts I have covered the main technical tools that I use for analysis. They can be useful, but remember – never depend solely on them, or you will start losing money.
Here is my 80/20 golden rule that I strongly recommend to apply in your trading:
Only 20% of your analysis should be technical and 80% – fundamental. (Click to Tweet)
P.S. If you want to learn more about how I trade, check out the link below: