3 Forex strategies. Using Fibonacci retracement to 1) identify support and resistance levels 2) know when to open and close positions AND 3) follow trends.
From the Vitruvian man, pyramids of Egypt to the works of Le Corbusier, they are all based on the golden ratio. For centuries, designers and scientists have studied and made use of the golden ratio, seeing how it occurs naturally in nature. Forex traders took it a step further and created the Fibonacci retracement to establish patterns in a chaotic financial market. What is amazing is that it works very well, and can be used in several ways:
Identifying support and resistance levels
Any respectable Forex trader should be aware of support and resistance levels as these are some of the most important aspects of the Forex market. However, it can be difficult to identify the exact support and resistance levels then draw a line to show them. Besides that, there’s the hassle of having to repeat with every timeframe you switch to and currency pair you load.
To make the job easier, just load the Fibonacci retracement tool and let it do the rest. Just take a look at the image below.
See how the Fibonacci levels mark all the levels of support and resistance? This is an easier way to identify the S/R levels. What’s more, levels set out by the Fibonacci retracement are more effective because most traders use this indicator. Compared to drawing your own lines, Fibonacci retracement ensures your S/R levels are as close to everyone else’s.
Know when to open and close positions
You can’t claim to be a trader until you complete the open/close circuit, yet these are also the most difficult decisions. In fact, your decisions on opening and closing positions are what determine if you will succeed or not.
If that sounds like a lot of pressure, here’s some good news, use the Fibonacci to increase your chances of making the right decisions. On the same Forex chart above, you can use the Fibonacci levels to determine when the time is right to open or close a position, since you will know the S/R levels.
For example, it is unlikely that a pattern reverse in between two consecutive Fibonacci levels. Knowing this, you know to enter trades around the Fibonacci levels and close open positions around these points too. In between these levels, you can let your trades run and rack up some profits.
You can also incorporate the Fibonacci retracement in any Forex strategy you’re already using, such as the DIBS method of trading or any other strategy. It just fits in and improves the strategy.
One challenge in following a trend is knowing when it’s over. If you wait too long, then you might lose some of the profits in the reversal; yet if you close too early, then you miss out on the trend. How then to follow a trend? Draw a Fibonacci retracement.
Let’s assume someone has made a whole lot of pips following this uptrend, how do they know to close the position? Well, the Fibonacci retracement shows us this at point B in the chart above. At point A, this is not the best place to close the trade because there’s probably just a correction. However, when prices failed to pass through the established resistance at point B, that indicated a very strong resistance and that bulls had left the market.
Without the Fibonacci retracement, a trader could have been stuck on a losing trade while losing more money on overnight swaps. This makes the Fibonacci retracement an ideal indicator for following trends.