How to trade using fibonacci retracements

This article would cover on how to make use of the fibonacci retracements to trade the financial market forex.

What is a Fibonacci Retracements.

Fibonacci Retracements levels are horizontal lines that specify the possible support and resistance levels where price is likely to occur,and potentially move in a reverse direction.

The picture above is an example of a fibonacci retracements.

Fibonacci is a tool widely used by forex traders and it works. The fibonacci consist of levels and those levels are in percentages. This percentages show how much a price as moved. This levels are 23.6%, 38.2%, 61.8%, and 78.6%. The 50% is also used but not official a fibonacci ratio, but it is greatly used.

Now the the fibonacci is very easy to use and not complicated at all. The whole idea on fibonacci is to go long (buy) on a retracement at a fibonacci support level when the market is trending up. While for short(sell) is the vice versa, you go short (sell) on a retracement at a fibonacci resistance level when the market is trending down.

Explanation would be given on how to trade using the fibonacci with picture illustration.

Now let's go straight into how to make use of the fibonacci levels.

To pick a trade or to find a level on fibonacci we need a swing highs and also a swing low. It must be a recent swing highs and also a recent swing lows.

This swing highs and lows are the levels we would be drawing our fibonacci retracements.

To look for an uptrend or go long/buy:

Looking at this image above we made use of the fibonacci to go long/look for a buy signal. The level we are making use of is the 61.8% and 50%. To go long/buy we have to wait for the market to create a recent swing high and recent swing low forming a support and resistance while ranging downward as seen in the image above. Then we pull our Fibonacci retracement from the support level of the recent high and low,we pull it up to the recent resistance. Once we have done that we wait for the market to trade into the 50%/61.8% level that would then be our entry. As seen in the image we pulled our Fibonacci from the support up to the resistance,we then waited for the market to trade into the 50%/61.8% level which it did. That is when you take your buy/go long. After placing your buy you place your stop loss 10 or 20 pips below your entry you then make use of a 1:2 RR. What i mean by that is if you make use of a 20 pips stop loss your take profits would be 40 pips that would be a 1:2 risk to reward ratio.

To look for a downtrend or go short/sell

To look for a downtrend is the vice versa of looking for a uptrend.

Looking at this image above we made use of the fibonacci to go short/sell. The level we are still making use of is the 50%,61.8% level. To go short/buy we have to also wait for the market to create a recent swing high and recent swing low forming a support and resistance while ranging downward as seen in the image above. Then we pull our fibonacci retracement from the resistance level of the recent high and low,we pull it down to the support level. We then wait for the market to trade all the way into the 50%,61.8% level which it did in the image above. The market traded into the 50% level giving us the opportunity to go short/sell. After the market traded to the 50% level that is our entry,we place a sell order and the place our stop loss 10 or 20 pips below our entry and our take profits should be a 1:2 RR. As explained earlier if you should place a 20 pips stop loss then your take profits would be 40 pips which would make this a 1:2 risk to reward ratio.

Frequently asked questions

What timeframe is best to use the Fibonacci retracement:

You can make use of the Fibonacci retracements on any time frame as it works on all time frame but the best time frame to make use of the fibonacci is the 1hour time frame.

Would the Fibonacci stop working

Well the simple answer is NO. The fibonacci retracement won't stop working as it is always in use to trade forex

Fibonacci retracements is one of the best tool you can make use of as a forex trader as it's tend to give when to enter a trade and also exist a trade but also note as it does not always give you a 100% win rate record but it is perfect to use for trading the financial market.

Komolafe Peter Adedayo

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