Fibonacci Forex Trading Strategy
Profitable trading strategies are usually extremely simple. Fibonacci is one of the easiest forms of technical analysis to grasp which is why today I will show you a Fibonacci Forex strategy.
What is the basis of Fibonacci trading? These levels are calculated relative to the size of the previous move i.e. the value from one swing point to another. Technical analysts treat these points just as they would treat conventional support and resistance.
Following, are diagrams to visualize it in action…
Drawing in an uptrend
Drawing in a downtrend
If you are new to this concept then I suggest you take a look at our Fibonacci article which breaks everything down.
Components of the system
This system focuses on 5 aspects:
1. Direction of the trend
The market must be in an uptrend or downtrend for us to consider a trade, and trades must only be executed in the direction of the trend.
2. Fibonacci retracements
Retracement levels 38.2%, 50%, and 61.8% are the areas to focus on when opening a position, price must test one of these points!
3. Historical support and resistance
By using historical zones to give confluence to Fib levels, the probability of trades working out increases significantly.
Candlesticks give us insight into the supply and demand at the current moment because of this we will use them to confirm trades i.e. candlesticks act as our entry trigger.
5. Fibonacci extensions
Extensions will be used to set take profits; technical analysts generally focus on 2 levels – 138.2% and 161.8%.
Now that the different aspects have been laid on the table, it is time to bring them all together in a system.
- Identify the overall trend on the larger timeframe. You must look for buying opportunities in an uptrend and selling opportunities in a downtrend. However, in choppy or range-bound environments you must not be trading this system.
- Draw in the major historical support and resistance zones on the chart.
- Connect the high and low of the current leg of the trend using the Fibonacci tool.
- Mark the areas where there is a historical zone near one of the Fibonacci levels (38.2, 50, and 61.8)
- Wait for price to test one of these overlapping areas (Fib level and historical support or resistance)
- If a strong candlestick prints (closes) in your direction then place a trade. Without confirmation from candlesticks, do not open a position!
- Set your stop loss past both the Fib level, zone, and any candlestick wicks.
- Set the TP at the 138.2 or the 161.8 Fib extension levels. If momentum is strong then price should extend to the 161.8. In contrast, if momentum is weak use the 138.2 level.
Those are the rules, let us see the strategy in action.
Buy Trade – GBPCAD H1
Sell Trade – AUDJPY H4
I need to highlight, the strategy I have discussed is just a starting point, all strategies need to be tested and adjusted to gain the positive expectancy all traders are after.
Follow these rules and you will be well on your way.