Trading fibonacci retracement: turning-point-price-action
Trading forex at fibonacci retracement levels
One good technique of forex trading is to open a position at a turning point based on fibonacci retracement levels.
In a 3-step trading strategy, forex traders do the following:
- Identify price trend and wait for price to retrace to fibonacci retracement levels
- Fibonacci retracement levels are price retracement that complies with fibonacci ratios
- Examine price action at these fibonacci retracement levels. Once candlesticks and or chart patterns indicate that it is a turning point, enter position and wait for price to expand
Fibonacci retracements are a type of price action that is visible in forex trading
In forex trading, currency prices move in wave patterns. There are mainly 2 types of waves:
- An expansion wave that moves price further away from the origin of the wave. It is usually along the direction of the dominant trend and pushes price further out. This is the wave that traders try to get on.
- A retracement wave is one where price retraces or backtracks towards the origin of the wave.
A fibonacci retracement is a price retracement that complies with fibonacci ratios. These are 23.6, 38.2, 50.0, 61.8, 76.4 and 100.0 percent retracement levels. Because a wave that retraces past its origin is considered to have reversed or started a new trend, fibonacci retracements of more than 100.0 percent are not applied.
Price retracement comes from profit taking and counter trend trades
Price retracement comes about because of a combination of profit taking by trend followers as well as trades placed by counter trend traders.
Example: EURUSD in uptrend
In this EURUSD uptrend, price action that pushes EURUSD price further up belongs to expansion while the price action that makes EURUSD backtrack belongs to the retracement wave. A retracement wave takes places because bulls who made money begin taking profit leading to increase in selling pressure. Bears who feel that EURUSD is going in the wrong direction or simply overbought decide to sell. These increase the selling pressure. Price starts to retrace when selling overcomes buying.
Price retracement ceases when it reaches a fibonacci ratio (50.0 percent in this example) where sellers are no longer keen to sell further while those waiting on the sides to buy feel that it is time to enter.
Price action at fibonacci levels
As fibonacci ratios are widely adopted for forex trading, the levels become reliable turning points. Visible price action such as candlestick patterns e.g. engulfing candles, pinbars, or when we go to the lower time frame, reversal chart patterns, give credibility to fibonacci levels. These reaction to the horizontal levels fibonacci retracement levels show that the market is indeed observing and respecting them. It is then a matter of time until the forex trader can find an entry trigger.
High probability forex trading setup
To forex traders, fibonacci ratios are very good levels to buy-low-sell-high. Rather than to chase after prices such as buying high and anxiously hoping it will go higher, fibonacci ratios are very good for predicting turning points. In combination with other input (below), they can be used as high probability trading setups to trade forex. Trading fibonacci retracements is also an important aspect of price action forex trading using Tflow® Forex Strategy.
- Fibonacci expansion and projection
- Trendlines, horizontal supports and resistance
- Chart patterns
- Candlestick patterns
- Multiple time frame analysis
- Documented price phenomenon