If you have read my previous post showing you how to plot the forex Fibonacci indicator on your chart, you will understand the power of the 0.382, 0.500 and the 0.618 Fibonacci retracement level. These retracement levels are areas where you will the price being repelled by them. What makes Fibonacci trading such a popular system is because of its ability to predict the subsequent movement of the price which is through its extension.
Here is how the extension works:
1) When you see the price retracing to the 0.618 level and then being repelled by it, there is a high chance that the price will extend itself to the 1.618 level.
2) When you see the price retracing itself to the 0.500 level and then being repelled by it, there is a high probability that you will see the price extends to the 1.500 level or even 1.618.
3) If you see the price retracing itself to the 0.382 level and then repelled by it, you will most probably see the price extend itself to the 1.272 level and then move to the 1.382 level.
With your understanding of the extension, you will now be able to understand how this forex Fibonacci trading system works.
First of all, you need to setup either the Stochastic or RSI to help to identify whether the market is oversold or overbought.
Next, you need to setup a MACD indicator to help you identify the right time for entry.
Once you got this 2 forex trading indicators setup, you will need to draw Fibonacci whenever you see a swing high and a swing low. All you need to do is to wait for the price to retrace back to either one of the 3 levels and then check your indicators for signal. If the price did not retrace but continue to move higher or lower, you just have to remove your Fibonacci and then redraw them again with the new swing highs or swing lows.
Whenever you see the price retracing near a level, you should check your indicators for the following
1) If you are in an uptrend and you see the price retracing back to the 0.500 level, you should check your Stochastic indicator to see if the market is oversold or not. If it is indeed oversold, you should then move on to see your MACD indicator and wait for the histogram to flip over to the upside again before you enter your trade.
After you have entered a trade, your exit strategy is equally important. You will usually exit your trade 10 pips before the expected extension and you should always place a stop loss around 20 to 30 pips below the level of retracement.
2) If you are in a downtrend, the conditions that are stated above shall be reversed.
If your Fibonacci retracement levels coincide with a major support or resistance level, this will give you more strength in that level and thus increase your chance of winning.
Do not start to trade immediately with this forex Fibonacci strategy. You should always try any new strategy out on your demo account and then move it to live only when you are able to trade profitable with it consistently.
Note to Readers
Do note that the above strategy is a general forex strategy that has not been fine tuned. In order for you to trade with it, please fine it tune on a demo account. If you do not know how to fine tune a strategy, please read the below
http://www.forexindicator.org/how-to-formulate-your-own-forex-strategy.html
For those of you who are totally new to forex trading, I will suggest that you read through this blog post that I have written for beginners
Forex Trading Tips For Beginners
If you are interested to learn how I do my forex technical analysis, you can take a look at the post below
Hey , just want you to know , your fib level and profit target are phenomenal! almost consistent profits.As a newbie , your course are easy to learn and easier to understand than other fib tutorial.Im combining your strategy with snr and ma.kudos.thanks
Hi,
I’m a newbie in forex trading, i just follow what has been mention in the article,
Surprise!!!, I got all winning trades (5 trade in a row).
Many thanks
Hi
I would like to know is there any software that I could to auto TRADE follow the indicator? example if I’m using parabolic SAR indicator
the system will auto trade for me as the Parabolic SAR settings depend the time frame I choose to TRADE, such as if the dot from
above it will sell and if its at the bottom it will stop sell and continue buy. Please advise and share me the link.
Really appreciate your help for this useful information. Thanks.
Regards,
Reen.
Hi Reen
You can’t trade based on Parabolic flip alone as it will cause you to lose all your money.
Trading is not as simple as just following one indicator. You need to have a way to validate a trade so that you will not get into losing trades that often.
Hi,
what platform do you use?
I always have problem plotting Fib extension level
I am using FXCM trade station
hi dear
how we can know about trend. because if we draw wrong trend we cant have true trend line.
how you detect trend ???
Hi Amir
You can detect a trend using the 200 EMA. When the 200 EMA is sloping with good gradient in a particular direction, it is showing you that the trend is currently very strong in that particular direction.
Hi
Can I use this method for trading gold and silver?
Hi Anthony
I cant tell you whether you can or not as I personally do not trade gold and silver.
Hi
I’m studying your Fibonacci trading. Can you please tell me which TimeFrame you’re using?
Thanks,
Ben
Hi Ben
I am using them on the 15 minutes and hourly chart. It does not really matter as it works for all time frame.
Hi K,
Can I use this trading system for all pairs?
Thanks
Hi Tony
Yes sure, you can use it on all currency pairs
hi, your articles are very good indeed. i keep coming back to ur website. i am a newbie in forex and treding demo for 3 months. my question regarding fibonacci is very basic, how could i confirm that price after reaching a certain fibonacci level is held by it? price, as i have seen, after reaching certain fibonacci retracement level tests it several times.
Hi
There is no way you can confirm that the price is going to be held by it as there is nothing 100% in trading. What we are saying is there is a higher probability that the price is going to be held by the Fibonacci level and not 100% will be held by it.
However to give us a higher probability of winning, I usually wait for the price to close above or below the fibonacci to make sure that the price respect that level before I enter a trade. In order to increase your probability of winning, you can make use of multiple fibonacci as the price will more probably be held by multiple fibonacci on the same level than 1 fibonacci level.
Your answer lifts the intelligence of the debate.
Hi ,
What are the parameters for the macd and stochastics?
Thanks.
Hi Jay
The setting are simple default setting
MACD (12,26,9)
Stochastic (5, 3, 3)
Hi ,great work you have there.Pls what is the settings of the above indicator(Stochs and mac d).Thanks
Hi
Thanks for the lessons that you provide. Regarding the way that you set the fib levels, I still believe that you are pulling the lines backwards. The lines should be started at the beginning of the move and pulled to the end of the move. This results in the retrace first hitting the 38.2 level, then the 50% retrace, followed by the 61.8% level. It doesn’t make since that a retrace of the move first hits the 61.8% retrace of that move. In any case, trading fib reverses with secondary confirmation has been a very profitable strategy. Again, thanks.
Hi Glenn
I understand your point. Your 38.2 level is actually my 61.8 level. Your 38.2 level is telling you that the market is retrace by 38.2% and my 61.8 level is telling me that the price is now at 61.8% of the full swing. In fact, there are the same thing but that is how the Fibonacci level on my trading platform works.
If I pull it the way you suggest, my extension will not be on the right side.
Really grateful that you bring this up as I believe that it does help to clarify things up for those who are also confused.
hi, first of all i want to thank u for giving free tutorial . i want to know what frame time is more suitable applying the fibo. can it be used in small time frame? (5 min ,15 min )
Hi Sani
In fact, the Fibonacci levels are suitable for all time frames. You can definitely draw it on a smaller time frame.
Hi.thanks very much for ur help. You had gave me a lot of valuable knowledge in forex. im a new trader and a losser but now im more confident to trade. Im gaining profit using demo account but now i will continue to see the progress and wait until one month and see how much i gain.
Regards,
Sani
Hi,
I have set fibonacci level but i drag it low level to high level.is it right ?
Hi Abhhishek
It depends on whether you are in an uptrend or downtrend. If you are in an uptrend, you just have to make sure that your extension for the 1.272 and 1.618 is upward and if you are in a downtrend, you have to make sure that the extension is downward. Do let me know if you have any problem.
Hi,
I can’t still find help to setting fibonacci after following your link. It is difficult for me setting the parameters on my platform,0.382,0.500,0.618,1.272,1.382,1.500,1.618. maybe a more precise broader way of doing this will be of greater help to newbies like us.
Thanks
Kingsley
Hi Kingsley
In that case, you need to check with your broker on how you can plot Fibonacci on your chart. For me, I just have to select a high point and a low point and the system will automatically plot for me the levels.
can u teach me how to change the MACD indicator to the one you use cos the one in my MT4 didn’t come like this thanks and i ll like it if u can send the reply to my mail
Hi Ray
Sorry as I am not using MT4 and do not have any idea how to help you with this one.
hi, ray
in mt4 you simply drop 2 EMAs (26 and 12) on the chart. in other words you’ll see their crossings not in the MACD frame, but on the chart.
Hi Abelly
Thks for dropping in this tip. You are wonderful.
Hi
I was back testing this strategy that you shared on the EURUSD for Year 2010, and the accuracy looks great. However, in the current downtrend, the MACD has not had any flip at all, as all of them are always on the low side. In this case, is there any ways to customize this strategy for such situations?
Thanks and regards
Nelson
Hi Nelson
Personally, if there is no flip on MACD, I will not enter any trade and wait for it to occur. The key to sound trading lies in your adhesion to your trading plan and that is the only way you can profit from the market.
Alternatively, you can move on to other currency pair to look for trading opportunity while waiting for the right setup on EURUSD.
Hi
Thanks very much for the advice =)
Regards
Nelson
Hi
Please teach me how to set the FIBONACCI levels as i am new to this.
Many thanks
Rgds
Praks
Hi Praks
If you are interested to learn how to setup fibonacci levels, you can take a look at this post that I have written
http://www.forexindicator.org/forex-fibonacci-indicator-explained.html
Thanks for the tutorial, it has claried awhole lot for me as a new trader.
I just demo-ing for now..so far it lost and win using leading and lagging indicators.
I think by far FIB has open the doors for me, I can set my profit margain ahead, exits and entry points,and identify the type of trade for the day.
I do thank you,
Thanks
Glad that you find the information useful for you. Demo trading is one of the most important part of your trading career. Treat it like live trading and horn your skill there. You will be able to trade profitably one day.
Do you use a automated trading platform for your trades
Hi Chips
Personally I do not use automated trading platform. I trade manually with my analysis only.
nice ,but must be tested.
Hi Dan
I am glad that you are testing the strategy out before trading with it. Just a reminder to all my blog readers, you must always try out a new strategy on a demo account before applying them.