Previous Story
Forex Trading Strategy – How to Pick Entries Using Fibonacci Retracement levels
One of the most challenging aspects of trading is deciding at what price level to enter. Almost every trader has found themselves in a position where their initial thought was correct, however they were stopped out as the market retraced before moving in the direction they expected. By being able to select entries more effectively, a trader is able to not only reduce their losses and drawdown but also increase their profit potential and improve their overall performance. One of the most effective tools to identify good entry points are Fibonacci retracements.
Fibonacci retracements are based on the mathematical findings of Leonardo Fibonacci, who discovered a series of ratios which exist in a sequence of numbers (known as a Fibonacci sequence) where each number is the sum of the previous two numbers ie. 1,1,2,3,5,8,13,21… It is the ratio between these numbers which give us our Fibonacci levels of 23.6%, 38.2%, and 61.8%. The market also places significance, however, on the 50% retracement and the less commonly known 78.6% and 88.6% retracements.
Now that we have identified the key Fibonacci levels, the next step is knowing how to correctly draw and identify these levels on our charts. When drawing a Fibonacci retracement it’s important to always work from left to right regardless of whether we are looking at a downtrend or an uptrend.
In the case of an uptrend, working from left to right, using your Fibonacci tool, connect the lowest low of the trend and the highest high as shown in the example below.
As seen in the example above, the uptrend in EURGBP from 31st May 2016 to 2nd June 2016 retraced to the 23.6% Fibonacci retracement before resuming its uptrend.
In the case of a downtrend, working from left to right, using your Fibonacci tool, connect the highest high to the lowest low as shown in the example below.
As seen in the example above, after USDCAD declined from 1.3188 to 1.3085 on 24th May 2016 it retraced to the 78.6% Fibonacci retracement before resuming its downtrend.
Fibonacci retracements can be used on any timeframe and on any trend. However, once the highest high or lowest low is broken, the Fibonacci retracement should be re-drawn to account for these changes. Generally speaking the higher the timeframe used and the longer and clearer the trend, the more significant the Fibonacci levels will be.
Now that we’re aware of how to correctly draw Fibonacci retracements, the final step is how to use these levels to most effectively identify prime areas to enter the market.
Although Fibonacci retracements can be used effectively on their own, especially on longer timeframes and trends, they are most effective when used to identify areas of confluence. By identifying areas where Fibonacci levels, pivot points, whole numbers, swing points (etc) exist within a tight range, we are able to identify areas where significant support or resistance is likely to come into play. The more factors we have in an area of confluence, the more likely we are to see a reaction from that area.
As seen in the example above, NZDUSD rallied from 30th May 2016 until 3rd June 2016, then retraced to the 0.6900 level and 23.6% Fibonacci retracement level before resuming its uptrend.
Although Fibonacci retracements are an excellent addition for any trader, we only use them to help identify prime areas to enter into the market. As always we should already have a clear, rational reason for entering into that currency pair with a clear bias based on either fundamentals, sentiment or ideally both.
The post Forex Trading Strategy – How to Pick Entries Using Fibonacci Retracement levels appeared first on Jarratt Davis.
Source:: Forex Trading Strategy – How to Pick Entries Using Fibonacci Retracement levels
