Fibonacci Forex Trading | Investing Guide & Tutorial

Fibonacci forex trading is a good example of how an understanding of mathematical theory can help elevate the skill of an FX trader. Fibonacci and forex trading go hand-in-hand to understand where the market may bounce towards – either lower or higher – and therefore help traders make shrewd investing decisions. A Fibonacci forex trading strategy can be quickly understood with a walk-through of the fundamentals. We also cover the tools and charting software needed to get started trading forex using the Fibonacci sequence.

What Are The Fibonacci Numbers?

Introduced by Italian mathematician Leonardo Pisano Bogollo in the 13th century, the Fibonacci sequence is a series of numbers in which after 0 and 1, each following number is found by adding up the two numbers that go before it:

0, 1, 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, 196418, 317811…

If you look closely, it is working as follows:

• 0 + 1 = 1
• 1 + 1 = 2
• 1 + 2 = 3
• 2 + 3 = 5
• 3 + 5 = 8
• 5 + 8 = 13

And so forth… It can continue on to infinity.

Using The Fibonacci Numbers For Forex Trading

The Fibonacci sequence can be translated into a forex trading strategy due to some interesting relationships identified within these numbers.

The Fibonacci Forex Trading Golden Ratio

1. If you divide a number by the previous number, you would get approximately 1.618. This number is used as a key level for Fibonacci extensions. 1.618 is known as the ‘golden ratio’ of ‘phi’.
2. If you were to divide a number by its subsequent highest number, you would get approximately 0.618. This number works to provide the basis of the 61.8% Fibonacci forex retracement level. 0.618 is also particularly interesting as it is found throughout biology, nature and the cosmos, from the shape of playing cards and snail shells to Greek vases and the spiral galaxies of outer space.
3. If you were to divide a number by another two places higher than the original number, you would get approximately 0.382. This number is used to form the basis of the 38.2% Fibonacci trading retracement level.

Retracements

Fibonacci forex trading retracements provide investors with price levels for support and resistance where a reversal in direction might take place. As such, they can be used to establish entry levels. These retracements are predicated on the prior move within the market.

For example, if there has been a rise in price, traders can measure the move from bottom to top to understand where the price might retrace to before bouncing back and continuing on an overall upward trend.

However, if there has been a fall in price, traders could measure the move from top to bottom so they can understand where the price might retrace to before it corrects lower, and continues on an overall downward trend.

Extensions

As well as providing price points for support and resistance, Fibonacci forex trading extension levels can calculate how far a price might travel once a retracement has finished. If retracements are used to identify the start of a trend, then Fibonacci extension levels can be used to target the end of the trend.

Setting Up A Fibonacci Forex Trading Strategy

The first step is to understand how Fibonacci works in forex trading. You then need to identify in which direction the market is trending. Fibonacci retracement tools can then be employed to identify and monitor the three potential Fibonacci resistance levels – 0.236, 0.382 and 0.618. The direction you drag the retracement tool will depend on if it’s an upward or downward trend.

Tools

When setting up a Fibonacci forex trading strategy, you will need software, such as the MetaTrader 5 (MT5) platform. This provides Fibonacci indicators that enable traders to plot retracement and extension levels.

Traders just need to be able to measure X to A cycles. Once you have measured this distance, the software can divide the vertical distance using the various Fibonacci ratios to plot the Fibonacci levels.

Note, it’s worth checking out tutorial videos on YouTube and detailed PDFs online to see how a Fibonacci forex strategy is set up.

Pros Of Fibonacci Forex Trading

There are several benefits to using the Fibonacci numbers for forex trading, namely that the ratios act as primary mechanisms within a countertrend investing strategy. They help to show the direction that a previous trend is likely to follow and aid in identifying resistance levels, placing stop-loss orders, and helping traders to set target prices.

Cons Of Fibonacci Forex Trading

Even when using Fibonacci retracement levels for forex trading, investors should be wary of trends. Traders should always check trends that are occurring within a current or longer time frame, ensuring that mistakes are not made when it comes to predicting the direction of travel. Errors can lead to large losses.

The Fibonacci formula is particularly ineffective with shorter-term day trading. Volatility can make support and resistance levels inaccurate. Spikes and whipsaws can also occur in the short-term which can make it difficult to place accurate stops and take profit levels.

Is Fibonacci Forex Trading A Good Strategy?

Fibonacci forex trading can provide investors with useful market signals. With that said, there are no guarantees of large profits. To start Fibonacci forex trading, choose a broker with easy-to-use Fibonacci calculators and software that let you easily plot retracements and extensions on charts.

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