- August 11, 2021
- 4:00 pm
- Technical Strategy
Fibonacci retracement levels as a profitable tool
When used correctly, Fibonacci is a very profitable tool for a Forex trading.
We can employ retracement levels or extension zones by looking at the Fibonacci magic ratios. The retracement levels are essentially the levels in which we anticipate the Forex market will retrace.
The retracement key zones are the 38.2 %, the 61.8 %, and the 78.6 % at a specific point before the trend will continue in a certain direction, whether it be in an uptrend or a downtrend. In some instances, we should expect the Forex market to retrace pull back to these other retracement zones.
Depending on the trend strength, the faster-paced trends may only retrace to the 38.2 level. The majority will retrace to a sweet spot between the 61.8 and 78,6 before continuing in its overall direction.
The -27 % level or the -61.8 % level will make up the extension zones, or target zones. In a trend Fibonacci retracement foundation, these zones are the targets to which we will look to trade.
Due to its nature of working with trends, Fibonacci will be visible on all timeframes, although we believe it will be considerably stronger on the weekly or daily timeframes, which will suit a swing trading strategy. We do not recommend using retracement tools on timeframes smaller than 1 hour because they are less effective.
Fibonacci retracement foundations
Direction Fibonacci retracement foundations are used to determine where the Forex market can retrace and then extend within a certain range or trend. Fibonacci is a fantastic tool for building trading setups based on confluences.
They function well with various trading tools and technical indicators. They can be repeated indefinitely until the trend changes, then repeated several times into the new trend.
In certain situations, we may look for a pullback to the 38.2% level in stronger trends, or we may aim for a pullback to the 61.8% level, which is the Fibonacci golden ratio. The golden area between 61.8% and 78.6% is where we should be searching for most of our trade setups.
Then, within the overall trend direction, we can conduct trades to extend our Fibonacci target extension confluences. The extension confluences are essentially where we look to target or trade, and they should be used within a chart and other tools to locate the optimal target to come out and exit the trade closed.
Extension confluences
When deciding to exit a trade, we should look to the left over significant levels of support and resistance to determine where the market has been and whether that level is a critical level within the market. Always round to the next key level or psychological zone when calculating a level.
Basic trendlines are another important tool for finding trades at those extension levels. The Forex market will frequently break out of minor counter trendlines printed within the Fibonacci retracement zone. After that, you’ll break out towards extension level -27.
Fibonacci in motion
In order to get the strongest levels to actually trade to Fibonacci in motion, we need to utilise the price action around it. Look to the left for previous Forex market structure and use support and resistance levels to develop logic. Especially the psychological critical levels that are rounded require analysis. Depending on the trend and volume, we can then try to establish more confluences.
