What is the Best Fibonacci Trading Strategy in the Forex Market?
Fibonacci is a currency trading strategy that traders can use besides the primary strategy, or as an individual trading strategy.
Fibonacci is critical in the financial market as it is directly related to nature.
In the whole section, we will see what the Fibonacci is and how you can build a trading strategy in the forex market using Fibonacci.
Let’s have a look at what the Fibonacci means.
Fibonacci is a sequential number that is taught in High School.
The sequential number starts from 0, and it continues to an unlimited number.
Fibonacci is dependent on the previous number and the present number to calculate next numbers.
For example, the first sequence of even numbers is 0, and the second is 1.
If you want to calculate the third numbers, we should add the first and second numbers (0+1=1).
Later on, if we want to calculate the fourth number, we should be at the second number and third number (1+1=2).
Following the sequence we can find the Fibonacci sequence as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on.
Why is Fibonacci important in the forex market?
We know the evening is moved with the same process from the Macro level to the micro-level.
If you look at the Macro level that is usually seen from the microscope, we can see the whole design was made like the design of the micro-level like the Universe.
So if the key is everywhere, it is evident that it has some importance in the financial market. There is no reason why he is everywhere in the Universe.
However, we will focus on how the Fibonacci is used in the forex market to make a decent profit.
Traders can predict the movement of a currency pair for the possible target area by using the Fibonacci numbers.
Furthermore, we can use the Fibonacci as an individual trading strategy.
Fibonacci Trading Strategy
Before moving to the trading strategy, we will see some basics about the calculator.
#1 Sequence of Fibonacci
We have seen the Fibonacci number above the section, but we will also find it in the forex market.
If you look at the sequence again it seems like starters as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,….
We will use this number and calculate the sum of rational retracement and extension levels to identify the possible movement.
Some necessary calculations of the Fibonacci sequence are shown below:
- If we divide a Fibonacci digit by the next digit, results could come as nearly as 0.618. in the forest market, this number is called as 61.8% Fibonacci retracement level.
- If we calculate the Fibonacci number with the previous figure, the result comes as early as 1.618, which is known as the Fibonacci extension level.
- Furthermore, if one step higher and divide the number by another number that is two places higher, the result would come as nearly 0.382. In the forex market, it is often known as a 38.2% Fibonacci retracement level.
Above these retracement levels, 161.8% is the Golden Ratio.
The inverse of the Golden Ratio is 0.618.
It is used as a significant level as most of the creatures in the world follow it.
The financial market, the Golden Ratio, is crucial. It is often considered as a right retracement level or the extension level.
The 61.8% retracement level is used as an entry point for a trader after the first move.
On the other hand, 161.8% Extension level used as a possible profit-taking area.In the section below, we will see how we can implement these two-level with an appropriate guide.
#2 What is Fibonacci Retracement?
Fibonacci retracement is used to provide a price from where any reversal is going to happen.
We may see these levels in two market conditions, as explained below:
- After finishing a upside movement, traders need to point the Fibonacci tools from down to top to identify possible retracement level.
- Similarly, after completing a downside move, traders should plot this tool from top to bottom so that they can identify the possible retracement level.
The image above represents how the price is correcting towards the golden ratio before moving down. The same theory applies to the bullish movement.
#3 How to Use Fibonacci Extension?
The Fibonacci level is also an important indicator of how long a price may move after a correction.
Traders usually use this indicator to identify the possible profit taking area.
As we have seen before, 1.618 is a significant number that is known as the Golden Ratio, and we can plot this number as a Fibonacci extension of 1.618.
If the market moves to an uptrend and retraces 61.8% level, it may move higher towards 161.8%.
The same concept applies to the bearish market.
In this section, we have seen how the Fibonacci extension level and retrenchment level are used to identify the possible trade entry-level and potential profit-taking level.
In the next section, we will see an exclusive trading strategy based on Fibonacci.
Fibonacci Trading Strategy in the Forex Market
The Fibonacci indicator is free in most of the trading platforms, which makes it easy to use.
We will say how we can use the Fibonacci indicator in candlestick charts with candlestick patterns to get a profitable trade idea.
#1 Fibonacci Bullish Trading Strategy
Let’s consider that the market is moving up, and we will enter the market after a correction.
- Identify the uptrend and draw the Fibonacci retracement level from that down to top of the bullish leg.
- Enter a trade when the market retraces towards the 61.8% retracement with some bearish rejection.
- The target area would be a 1.618 Fibonacci extension from the start and end of the correction.
- Stop-loss would be below the rejection candle with 10 to 15 pips buffer.
#2 Fibonacci Bearish Trading Strategy
Let’s consider that the market is moving down, and we will enter the market after a correction.
- Identify the downtrend and draw the Fibonacci retracement level from that top to the bottom of the bearish leg.
- Enter a trade when the market retraces towards the 61.8% retracement with some bullish rejection.
- The target area would be a 1.618 extension from the start and end of the correction.
- Stop-loss would be above the rejection candle with 10 to 15 pips buffer.
It is an active trading indicator that is used by most of the professional and institutional Forex traders.
This indicator is handy in all financial markets from Forex, stock, crypto, or commodity.
However, no trading strategy can assure 100% accuracy.
Therefore, you need to follow proper money management skills besides a significant risk: reward ratio.