In today forex faq, we have a question on Fibonacci indicator from one of our fellow traders.
Below is the question:
When do you use Fib extention/retracement indicators?
For instance, at what points (in time) on the chart are the best to get good results?
The Fibonacci indicator is a tool that is commonly used by those big institutional traders and therefore you will find that the price will usually respect the retracement and extension of the Fibonacci indicator.
To answer your question on when is the best time to use the Fibonacci indicator in trading. I have separate them into 3 situation when you should use the indicator.
Situation 1: To identify the best time to enter a trade
Being able to identify a good level to enter a trade is very critical for a trader. Entering too early or too late will greatly increase your risk of being stopped out, therefore the Fibonacci retracement levels are good guideline for traders to enter a trade.
This is because the retracement level when identify correction can serves as a strong repulsion when the market hits that level.
Therefore since you know that that level has the ability to repel the market when it hits it, isn’t it great for you enter a trade in the direction of the repulsion. That is exactly how you can use the retracement for.
However not all retracement levels have the ability to do so effectively, you will find that the market actually break through the retracement level 40 to 50% of the time and therefore it will be great if you are able to identify a level where several Fibonacci retracement level intercept each other.
If you can find a level where there are 2 or more interception of different Fibonacci retracement levels, do you think it has the power to repel the price more effectively?
However I am unable to tell you more about this as it is covered in my Forex course and therefore will not be fair for those who has purchased the course.
For those of you who did not purchase my course, I will suggest you to trade using the 0.382 and 0.500 retracement level as there have more power compared to the rest of the retracement level.
Situation 2: To identify the best time to exit a trade
The extension of the Fibonacci indicator serves as a very good tool for exiting your trades. You will find that the price tends to get repelled by the 1.272, 1.500 and 1.618 Fibonacci extension and therefore these 3 levels are great places to exit your trades.
In fact, when the price get repelled by the 0.382 retracement level, you will find that the price tend to get repelled by the 1.272 extension level. Therefore if you enter a trade when the price hits the 0.382 retracement level, you can make use of the 1.272 extension level to exit it.
If you enter a trade when the price hits the 0.500 or 0.618 level, then I will suggest you to exit your trade at the 1.500 or 1.618 extension level.
These are mainly suggestion based on my own trading experience.
Do note that the Fibonacci indicator works on all time frames and all currency pairs. So in summary, you will use this indicator whenever you are looking for a point to enter or exit your trades.
There are a lot more to using this indicator that I cant talk about here in the blog as there are only available to students of my Forex course.
I hope that I have answered your question and do feel free to give your comments below.