Fibos help map swings

A Fibonacci strategy for day trading forex uses a series of numbers, ratios, and patterns to establish entry and exit points.

The Fibonacci Numbers

Named after the Italian mathematician Leonardo Fibonacci, the sequence of infinite progressive numbers is calculated by summing the preceding two figures: 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.

Yet for the purpose of financial trading, it’s not the numbers themselves that are important, but the difference between them.

These ratios unveil patterns which in turn help highlight opportunities.

Setting Up A Fibonacci Trading Strategy

The basic premise is that in a market uptrend, you buy on a retracement at a Fibonacci support level, while during a downtrend, you sell at a Fibonacci resistance level.

So, before you turn to the numbers and patterns, identify which direction the market is trending. Then to enable you to apply the markers, identify the Swing High and Swing Low points on your charting software.

Retracements

The theory behind Fibonacci retracements is that after a significant market swing, the price will return at least in part, to a particular point, before it continues in its initial direction.

So in practice, the numbers and formulas that feed into your retracement levels may allow you to predict future price points.

A normal Fibonacci forex trading strategy will see you draw three crucial retracement levels at; 38.2 percent, 50 percent and 61.8 percent.

Plot these three horizontal lines on your chart software and you’ll see where the market could return to before it resumes in the direction of the original trend. Note your top level, in this case .618, should not fail.

Fibonnacci retracment trading strategy is often used only after a trend has been established. This is because it needs to be applied onto the recent trend's high and low prices. Ratio levels will then be established which will then be further used as future potential price levels for reversal. This illustration is shown below.

Extensions

The next step is supplementing your forex trading strategy with extension levels. Extensions use Fibonacci numbers and patterns to determine profit-taking points.

Extensions continue past the 100% mark and indicate possible exits in line with the trend. For the purposes of using Fibonacci numbers for day trading forex, the key extension points consist of 61.8%, 261.8% and 423.6%.

Fibonacci Forex Trading Strategies In Action

Examples of forex trading strategies that use Fibonacci ratios include:

• Buying close to the 50 percent point with a stop-loss order just under the 61.8 percent mark

• Buying close to the 38.2 percent retracement point with a stop-loss order just under the 50 percent mark

• In a sell position towards the top of a substantial swing, using the Fibonacci retracement levels as profit collecting points

MT4 tools

When trading using Fibonacci strategies, the numbers, formulas, ratios, and patterns can appear daunting.

However, MT4 has chart indicators that will do the heavy lifting for you, offering retracement and extension level tools.

Final Word

Trading forex with Fibonacci strategies relies on ratios and formulas. The benefit of this is that it can help leave emotions at the door.

However, every trader is different and there are no guaranteed returns with a Fibonacci strategy. Instead, consider retracements and extensions as tools to help inform your broader market angle.