Each trader's strategy will be different, so as an investor you need to consider how each of the strategies below might fit into your overall angle on the market. Not every trader uses the options below, and it is alright if none of them align with your strategy. Strategies that utilize Fibonacci retracements include the following:. Almost all traders have a trading style or set of strategies they utilize in order to maximize profit potential and keep their emotions in check.
The Fibonacci trading strategy utilizes hard data and if a trader adheres to their strategy, there should be minimal emotional interference. The Fibonacci trading strategies discussed above can be applied to both long-term and short-term trades, anything from mere minutes to years. Due to the nature of currency changes, however, most trades are executed on a shorter time horizon.
Technical Analysis Basic Education. Trading Strategies. Advanced Technical Analysis Concepts. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways The Fibonacci trading strategy uses the "golden ratio" to determine entry and exit points for trades of all time frames. This type of trading is highly contested as it is based on ratios that don't necessarily correlate to the individual trade.
Sticking to a numerical trading strategy like the Fibonacci strategy will help to limit or remove emotional bias from trades. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
The Fibonacci sequence is a series of numbers where each number in the series is the equivalent of the sum of the two numbers previous to it. We then add 0 and 1 to get the next number in the sequence, which is 1. You then take that value and add it to the number previous to it to get the next number in the sequence.
If we continue to follow that pattern we get this:. The Fibonacci sequence is so important to this discussion because we need those numbers to get our Fibonacci ratios. With the advent of the internet, there has been a lot of misinformation on which values make up Fibonacci Ratios. Proliferation of Fibonacci analysis, particularly in the realm of trading, has encouraged misinterpretations and misunderstandings of how and what makes a Fibonacci ratio.
The math involved behind the Fibonacci ratios is rather simple. All we have to do is take certain numbers from the Fibonacci sequence and follow a pattern of division throughout it. Notice a pattern developing here? We could do this with other numbers in the Fibonacci sequence as well.
For instance by taking a number in the sequence and dividing it by the number that precedes it, we see another constant number that develops. Another pattern develops out of the numbers of the Fibonacci sequence. Now 1. Here are some more examples of patterns that develop by taking numbers in the Fibonacci sequence and dividing them in a pattern with other numbers within the sequence.
As you can see, we could get many different numbers by just taking numbers within the Fibonacci sequence and developing a divisory pattern within the sequence. However, this is not the only way to come up with Fibonacci ratios. Once we have the numbers from dividing, we can then take the square roots of each of those numbers to get more numbers.
See the chart below for some examples of those values. The last part of making these numbers Fibonacci ratios is to simply turn them into percentages. Using that rationale 0. So looking at our analysis we can then see that
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If you picked at the previous high prior to Point X marked with a blue line on the next chart as your starting point instead of Point X, you can see the price bounces off the Here is yet another confirmation — shortly after Point X, the price popped up to make a small high marked with a red arrow , before making its final descent to Point Y.
Now the lines are so close together, you can barely make them out. The Fibonacci analysis pointed in advance to this level being an area of support. All the examples in this section are using Fibonacci levels discussed in my previous post, Part 1. For the sake of clarity on these charts, I have removed the other Fibonacci percentages when showing a retracement or extension. When I am analyzing my own charts from scratch, I will be using all the Fibonacci points discussed in my previous post Part 1.
I will be picking off major highs and lows, usually on the 1 hour and 4 hours, and occasionally minute charts, to find my levels. I am particularly interested at points where the Fibonacci levels meet, and interested most in the Depending on my view on the market, I may use a Fibonacci cluster to place a trade or avoid the cluster if I first need to see it rebound or broken.
For example, if I wish to go long, but there is a Fibonacci cluster a few pips away, I will either wait until it is broken, or wait for a better lower entry to give myself more room to maneuver. Established Minimum Account Our rating Compare Brokers Our Forex broker ratings are based on real-life testing of over 10 criteria, including regulation, trading platforms, assets offered, customer service and more. Our Forex broker ratings are based on real-life testing of over 10 criteria, including regulation, trading platforms, assets offered, customer service and more.
You draw the Fibonacci Extension in the same way the drawing of the Fibonacci Retracement was described there. The next stage is to examine each level and decide whether each is any good as a profit target, even if it is to take a partial profit. Keep in mind that it is important in trading not to take profits too early. Examining the chart, do we see any confluences? There are two numbers which stand out as we work our way down the chart.
Firstly, the Secondly, below there is an even better confluence of the For example, in the example above, you could simply apply the Fibonacci extension in the other direction drawing away from the bottom end to the top and use one of the extension levels shown in the result — especially if it is confluent with a significant price or other indicator.
One thing that should be mentioned before we conclude this chapter is that it can sometimes be difficult to know which point to use for the start of the Fibonacci measurement. In the above example, the swing high point is very clear, but on other occasions it will be hard to pick.
In these cases, it is up to you whether to pick the technical recent high or low, or the price from which the strong up or down move seems to have truly begun. Indicators such as moving averages and stochastics are generally attempting to fit onto a market.
They may not necessarily work in all market conditions and they do not have any intrinsic properties that a market has to abide by. What I think makes Fibonacci exceptional is that the Fib ratios are inherently part of natural systems, including the markets.
Fibonacci ratios do not have biases for certain market conditions or economic cycles. This makes Fibonacci robust, versatile and timeless. One of my favorite Fibonacci plays is a retracement from the This level is derived by taking the A retracement consists of an initial move, a retracement of that first move, and then the subsequent move from the retracement, like so:.
So, if the initial move was pips up, the retracement would be Here are some examples of the This is a fantastic example of the accuracy of Fibonacci levels. After the initial move down, the price retraced back up 1, pips over 27 weeks and hit the Fibonacci level within 2 pips! These kinds of setups can allow traders to have single trades that yield over 1, pips while still controlling their risk.
When I trade a Fibonacci retracement, I like the price to hit the level and move away within one or two bars of the timeframe I am using, i. In the three examples above, the price bar hit the I always trade with a stop, and my profit target is where the retracement started, i.
Often the price will surpass that target, but I am happy to take my profit at this point. So what can we learn about Fibonacci? Fibonacci principles are timeless. Fibonacci principles can be used from the smallest time frames to the largest.
Fibonacci has no biases for certain markets: you can use them on anything that has a chart, from a stock, a currency pair, a metal or even a complex derivative. The sequence is this: starting with 0 and 1, each number is the sum of the previous two numbers. So, after 0 and 1, the next number is 1, followed by 2, followed by 3, then The number sequence goes on forever, expanding to infinity: 0 1 1 2 3 5 8 13 21 34 55 89 These numbers have some unique properties.
This particular ratio, 0. The next ratio is found by taking a Fibonacci number and dividing it by the number two places along in the sequence. For example, if we pick 21, we would divide it by 55, which is two places along. This gives 0. You would get 0. So, 89 divided by is again 0.
Continuing with this idea, if you divide a Fibonacci number by a number three places along in the sequence, for example, 55 divided by , you would get a new ratio: 0. So far, we have discovered three common ratios in the Fib number sequence: 0. The reason this series of numbers, and its associated ratios, are still being discussed centuries after first being widely known, is because they are found everywhere in nature, and today they are found in the markets.
For example, the human body is built around these ratios:. From the foot to the naval, to the head, the common ratios of 0. The proportions of DNA strands are also in line with the Fibonacci ratios. The Greeks, over two thousand years ago, used the Golden Ratio when designing the proportions of the Parthenon, as did the Egyptians when calculating the size and height to build the Pyramids. The price moves from the major low, at Point 1, to the major high at Point 2, then retraces Aside from the three ratios discussed, there are other ratios that are used by traders and also found in nature for that matter.
Three more common ratios are as follows: 0. Fibonacci begins with a simple sequence of numbers, each number being the sum of the previous two 2. Dividing consecutive numbers in the sequence, and numbers separated by one or two places, gives the common Fibonacci ratios: 0. The last ratio, These ratios are found in nature and are also found in the way price moves in a market.
The Fibonacci sequence of numbers can be used to discover ratios that are found in nature and in the markets. The key ratios are:. This is where the price moves in a direction, then goes back over that move before continuing in the original direction. Of course, retracements can also be retracing in the other direction.
By definition, a retracement traces a portion of the initial move. The amount that the initial move is retraced can be measured in relation to the Fibonacci levels. The price moved up from Point 1 to Point 2, then moved back precisely Now you should have the idea: the price moved down from Point 1 to Point 2, moved back up Can you start at different points to measure your retracement? A retracement can be measured with different Fibonacci levels using different starting points for the Initial Move.
Several highs were made before the price reached Point 1. When the price moved from Point X to Point 1, it retraced This is marked by the red horizontal line. Now, if you chose to use Point Y as the start point to measure the retracement, Point 2 was a Therefore, a retracement can in fact go past the start of the initial move depending on where you choose to start your measurement.
The Aussie-Dollar example also illustrates another point we will be examining later in this series of articles: different Fib levels produce confirmation points to allow us to plan trades. Looking over charts, you can find examples of small retracements that reach just the You can examine retracements from the smallest charts, e. The principles apply in the same way. As this series of articles unfolds, we will look further at how these principles can be applied to trading scenarios to find entry points, targets and protect risk.
Fibonacci levels used in trading start from A retracement can be measured in relation to the Fibonacci ratios 3. Multiple Fibonacci levels on a chart can confirm key price areas. On MT4, the following button is the Fibonacci retracement tool:.
Once pressed, click and drag it on your chart from your selected start point to your finish point. Double-click the Fib lines that appear and you can move the ends from the small squares at the ends of the handle to fine tune your selected points. When measuring an extension in relation to Fib levels, we measure it in proportion to the first move.
In other words, we look at the size of the extension and see what that size is as a percentage of the first move up to Point 1 on the chart above. This is not as straightforward as measuring the retracement, but with a little bit of practice it should be easily understood. For the sake of clarity, I have removed all other Fibonacci levels and just left one level displayed to prevent the chart from being too cluttered.
What that means is that the size of the first move is equal to the size of the extension. In practice, the size of the move up to Point 1 was pips, and the distance the price moved from Point 2 to the end of the extension was pips, i.
Here, the price moves down to Point 1, retraces to Point 2, and then hits the As with retracements, multiple extensions can be combined on a chart and this will be explored later in the series. In summary: 1. An extension can be measured as a Fibonacci proportion of the first move, or Wave 1 3.
Click and drag the mouse on the screen to your desired points. When Fibonacci is applied to trading, there are three common routes: 1. To recap, the So if the initial move was pips up, the retracement would be The price firstly made a high at Point-X at 1. It then moved down to the low at Point-Y at 0. So, the price moved 2, pips over 37 weeks. Then the price retraced to Point-Z at 1. Looking closely at the chart and the figures, the retracement was within 2 pips of the This is incredible given that the price travelled thousands of pips over many weeks and months, yet still made such a precise hit against a key Fibonacci level.
Identifying this level and seeing a clean hit could yield a trader in excess of a 1, pips if he chose to ride the price down after the retracement ended at Point-Z. I saw that the price had tested the The price had already moved quickly and I was concerned about where I would place my stop-loss.
This allowed me to enter the trade and place a stop just above the triangle, rather than a larger stop above the In other words, the profit target was greater than 3 times the size of the stop-loss. To recap, that means I took the size of the move from Point-X to Point-1 and measured that down from Point This is shown as the lower blue line in the following chart:. The price moved down nicely and hit the profit-target a few hours later.
The stop-loss was a little over 20 pips and the profit target was 80 pips. Fibonacci levels are applicable on both long-term and short-term charts. Fibonacci can be traded with other indicators and other chart-patterns. The Here is a simplified diagram of this chart pattern:. So, the pattern consists of three lows: the middle one larger than the two either side of it.
The middle peak is therefore referred to as the head, and the left peak is the Left Shoulder and the right peak is the Right Shoulder. Chart patterns do not come so neatly formed but over time you can train your eyes to spot them. The two blue circles highlight the Left Shoulder and Head, and the red line is the neckline. Classical technical analysis teaches that a trader should enter when the Neckline is broken or when the Neckline is re-tested after it is broken i.
However, I prefer to enter the pattern before the Neckline is broken. This is because if the price breaks the Neckline, it can still be a false breakout and come back to hit your stop-loss. If instead, you enter during the formation of the Right Shoulder, the price can break the neckline but just come back to your entry leaving you room to exit at breakeven rather than take a loss.
Zooming into a 5-minute chart, I noticed the price bounced against the My reasoning was that the price would at the very least go back up to Point-2 and this would allow me to move my stop-loss to breakeven. Of course, the price could continue down after my entry and give me a loss near my initial stop-loss at Point But the risk would be small compared to entering at the neckline and keeping a larger stop-loss.
My entry is marked with the small red line. The price successfully broke the Neckline after touching it a couple more times and then hovering around it. My early entry identified with an Using Fib levels can often allow you to enter earlier than if you used the chart pattern by itself. Earlier entries, particularly on smaller timeframes give smaller stop-losses and better risk-reward trades.
When the price retraces to a Fibonacci level, all that means is that the size of the retracement as a percentage is equal to a Fibonacci percentage. For example, if the price makes a low, then moves pips up to make a high, then moves back down When I am using other Fib retracements levels, such as But with the I have found it to be a very accurate predictor of price movement. Yesterday morning Tuesday 7 February , I saw a nice clean You could also have seen this on a 5-minute chart.
It is worth pointing out that the price at the As the day unfolded, the uptrend paused and developed into a range that lasted for about 35 minutes. During that range, another The other advantage an Typically, I place stops just below the If your minimum target of reaching the beginning of the retracement, i. The above examples are for long trades. They work the same in reverse with short trades.
In those cases, the Simplify your Fib retracement lines to Bounces off To recap, the Fibonacci Golden ratio is If you square root that percentage, and square root it again, you get 0. I often use a bounce off the The following chart is the point at which I saw the trade developing:.
The price bounced off that level to the exact pip. Trading Strategies. Advanced Technical Analysis Concepts. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways The Fibonacci trading strategy uses the "golden ratio" to determine entry and exit points for trades of all time frames.
This type of trading is highly contested as it is based on ratios that don't necessarily correlate to the individual trade. Sticking to a numerical trading strategy like the Fibonacci strategy will help to limit or remove emotional bias from trades. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Partner Links. Related Terms Fibonacci Fan A Fibonacci fan is a charting technique using trendlines keyed to Fibonacci retracement levels to identify key levels of support and resistance.
Fibonacci Retracement Levels Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Fibonacci Arc Definition and Uses Fibonacci Arcs provide support and resistance levels based on both price and time.
They are half circles that extend out from a line connecting a high and low. Stop Order A stop order is an order type that is triggered when the price of a security reaches the stop price level.