Trading the Fibonacci Sequence in Forex!

Born in Pisa, Italy in 1175 AD and son of Guglielmo Bonaccio Leonardo of Pisa (aka Leonardo Fibonacci) is considered the “greatest European mathematician of the middle ages”.

For us forex traders, the discovery of the fibonacci sequence of numbers 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and the golden ratio of 1.618 has proven to be very useful in determining high-probability turning points in the market.

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In the forex fibonacci tutorial here you’ll learn how you can incorporate both Fibonacci retracements and Fibonacci profit targets (based on the golden ratio) into your trading strategy.

As powerful as Fibonacci levels are in identifying high probability turning points (or at least consolidation points) in the market, it is always wise to seek additional confirmation by using additional indicators, such as iMarketsLive Harmonic Scanner and specific price points such as Pivots and well established Support and Resistance levels.

As always, the greater amount of evidence we can gather (i.e. weight of evidence) in identifying potentially profitable trades, the higher the probability that the trade will move in our desired direction.

Fibonacci is the sequence of numbers discovered by Leonardo Fibonacci, an Italian mathematician: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393 …….

Fibonacci numbers are started by 0, followed by 1, and then the third number is calculated through adding 0+1 (the first and the second number). Then for getting the forth number (3), the second and third numbers should be added (1+2) and …….

Now if you measure the ratio of each number to the next one, you will have the Fibonacci Ratios that are the same numbers (levels) we use in our Forex or stock market technical analysis: 0.236, 0.382, 0.500, 0.618, 0.764 …….

Fibonacci trading is becoming more and more popular, because it works and Forex and stock markets react to Fibonacci numbers and levels.

Fibonacci trading means to know when and where market reverses or keeps on moving. The most important thing in Fibonacci trading is that the Fibonacci levels act as support and resistance. When the price goes up, they act as resistance levels and visa versa. Also like regular support and resistance line, when a Fibonacci level is broken as a resistance, it can act as a support and be retested. It is the same as when a Fibonacci level becomes broken as a support (it can act as a resistance then).

Fibonacci Forex tradingFibonacci Forex trading is not complicated.

By using the Forex Fibonacci numbers on the charts, you can find more supports and resistances. It will be a big help to choose the right direction and avoid taking wrong positions.

To use the Fibonacci numbers on the charts, you have to find the top and the bottom of the previous trend. When the previous trend is a downtrend, you draw the Fibonacci levels from top to the bottom and extend the lines in the way that they cover the next completing and ongoing trend. When the previous trend is an uptrend, you draw the Fibonacci levels from bottom to top and extend the lines in the way that they cover the next completing trend.

You can use Fibonacci levels in all time frames. When you use them in the bigger time frames like daily, the result will be applicable for the next several days, weeks and even months and when you use them in smaller time frames like 5 minutes, the result can be applicable only for few hours because the price will leave Fibonacci levels area very soon.

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.

Or simply if you have made enough profit, you can close your trade and wait for the price to break the Fibonacci levels or fail and go down. 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 resistance.

Also keep in mind that when one of the Fibonacci levels is broken, the price usually pullback to retest. If you get ready for all these possibilities, you will not be trapped.

You treat Fibonacci levels like real supports and resistances. They really have no difference and sometimes they act even stronger.

Watch the videos in the training section for more info about Trading the Fibonacci Sequence in Forex.



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Vincent St.Louis
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