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Fibonacci Trading, How to Use Fibonacci Retracement with Table, Support & Resistance, Trend Lines and Japanese Candlesticks

Fibonacci Trading, How to Use Fibonacci Retracement with Table, Support & Resistance, Trend Lines and Japanese Candlesticks

Fibonacci Trading is a method of trading technical analysis used by Forex traders. You must be wondering what does this mathematical concept has to do with trading. Well, first let's recall what Fibonacci is. Fibonacci is a number system in which ratios of its numbers remain equal always. Discovered by Leonardo Fibonacci a mathematician from Italy, this series starts with 0 and then goes on like 0,1,1,2,3,5,8,13,21,34,55 and so on.

This number series is developed using the rule in which if you add the two consecutive numbers of the series, the resulting sum will be the number following those two numbers in the series. Also, after skipping the first few numbers in this series, if you will calculate any two consecutive numbers’ ratio, then it will always be 0.618. For example – 34/55. Coming back our Forex domain, there are two kinds of Fibonacci levels which are used in FX trading, they are-

Fibonacci’s Retracement Levels: 0.236, 0.382, 0.500, 0.618, 0.764. These levels work on the theory where if market prices are rising in a fixed direction, then they will return to a previous value and then will rise again in the same direction. Traders use these as their potential care and pausing levels.

Fibonacci’s Extension Levels: 0, 0.382, 0.618, 1.000, 1.382, 1.618. This level is used in trades where profit is sure and is also known as the profit winning level. There are many charting software available for calculating these Fibonacci levels on Forex. All major calculators include the levels, retracements and extensions. It is important to understand and identify the swing points before using Fibonacci on your trading chart. Swing high – This is a candlestick which carries a minimum of two lower highs on both left and right. Swing Low – This is a candlestick with a minimum of two higher lows on both left and right.

How to Use Fibonacci Retracement to Enter a Trade

How to Use Fibonacci Retracement to Enter a TradeAs we have read about Fibonacci and its use, it’s time to learn how to use Fibonacci Retracement for entering a trade. First and foremost thing about the Fibonacci tool is it predicts and works well when there is active trading in the Forex market. In other words, buying and selling of currencies must be occurring at FX. Fibonacci retracements guide a trader whether to go long or short as per the trending market – up or down respectively.

When FX trading is still, Fibonacci predictions become less efficient. Identify Fibonacci Retracement Levels Traders often seek a way to find Fibonacci retracement levels and they can do so by focusing on swing lows and swing highs of the market. For downtrends, a trader has to click on a swing high and then drag the mouse pointer to the latest swing low. While for uptrends, its opposite is done which means clicking on a swing low and then dragging the mouse pointer towards the latest swing high.

Resistance and Support Levels Because of the high degree of use of the Fibonacci tool by FX traders, its uptrends and downtrends levels act as self-fulfilling resistance and support levels. If a high number of traders are of the belief that a retracement can happen near a Fibonacci level and wait for the price to attain that level to open a position, then their pending orders can affect the market price. The Fibonacci tool asks for serious attention and becomes a bit complex to use at times. Moreover, there is no guarantee that the prices will always bounce from the Fibonacci levels.

Fibonacci Retracements are not Foolproof

There is no doubt that the Fibonacci Retracement tool is a trusted one for FX trading, but there come instances when  this tool fails, it is important to trade with keeping this fact in mind. The tools showcase the high success probability but sometimes things ten to turn a sharp turn as it Forex and nothing is fixed here. The tool creates a retracement by dividing the vertical distance between two taken points from the FX chart, mostly a high and a low level by key Fibonacci ratios. The ratios are among the following 23.6%, 38.2%, 50%, 61.8%, and 100% and the price levels sometimes go directly to 23.6% from a higher expected one.

FX market does not resume its uptrend because of the temporary resistance or support values, it instead enhances to reach the past Swing low or Swing high values. Every Forex trader uses the retracement tool as per his mindset, sometimes the timeframes and location also matter in these. Being a pure deed of probability and guessing, Fibonacci Retracement tools ask for a study and understanding the basic concepts of trade. This is the main reason why experts suggest to use another tool along with the Fibonacci Retracement one, to get extra coverage over the running FX trading scenarios. By combining the Fibonacci retracement along with any other trading tool can increases the chances of gaining profits and gives extra insurance about the FX trading. Keep your mindset according to the fact that FX is an improbable place and nothing is assured here

How to Use Fibonacci Retracement with Support and Resistance

There is no doubt in the fact that Fibonacci Retracement Levels helps in earning profits, it is also wise to understand that the tool cannot work efficiently all alone. Fibonacci Retracement tool seeks a combination with other tools to reflect data through which a trader can earn handsome profits. One such combining tool is Support and Resistance levels, the level where the price gets revert and stops. Forex trading is a probable thing and by sticking to the high probability values, a trader can earn well. Support and Resistance levels.

Support and Resistance levels when get matched with Fibonacci Retracement levels, a trader can rely on the prices where the majority of traders are trading. Both the tools when used together highlights the levels which can give higher profits, a support and resistance level when matches Fibonacci Retracement levels provides the price values.

The past resistance and support levels give the areas highly probable for trading at present time, the majority of FX traders uses the Fibonacci tool, a giant group of traders will be looking towards the same FX market areas and price levels, this will result in a heavy density of orders. Where the combined result from both the tools does not guarantee the bounce in price, the high number of traders trading at the same levels can give a strengthened probability for getting high profits. Always look when the Fibonacci Retracement levels match the levels of Support and Resistance levels, as these are the highly profitable levels.

How to Use Fibonacci Retracement with Trend Lines

How to Use Fibonacci Retracement with Trend LinesJust like Japanese Candlesticks, Trend lines are also used along with a Fibonacci retracement tool to understand the  FX market. We know the fact that the Fibonacci retracement levels tells about the retraced values of a price and helps a trader in getting worthy levels when trading is happening, so by using Trend lines, one can get the beat and can earn profits. The lines give the information about downtrend and uptrend of the market and when the FX charts show a horizontal and diagonal resistance or support level together, it means that other traders are focusing on those level as well. Trend lines use the present Forex data, to predict the movement supposed to happen at FX.

Trend lines vary from one trader to others, it is a subjective kind of matter to know the trend line pattern of other traders. But the presence of these lines only is enough to know that trade is happening. Now when a Forex trader knows that the market is churning in terms of trade, he can get indulge in the process to get the profits. Fibonacci Retracement tool can help in getting the worthy FX entry points. Just by getting the difference between an FX high and low and relevant ratios by the tool and then combining it with the trend analysis, a trader can drive his trading car towards the profitable directions. The combination of these two tools helps a trader in many ways and help in sailing his trade boat in on the FX Ocean.

How to Use Fibonacci Retracement with Japanese Candlesticks

The combination of the Fibonacci Retracement tool and Japanese Candlesticks are used for finding exhausting candlesticks, the combination can provide a clue when the FX market will be trading if one can tell the time or duration at which selling and buying pressure exhausted. One has to understand the basics of Japanese Candlesticks and Fibonacci Retracement tool as the formation of Doji, at the FX charts indicates the exhausted values. Well, it is advised to learn what Doji is by reading previous blogs. One has to be well versed with the tool so that the exact valuation of exhausted points can be revealed.

People who understand the sticks patterns and Fibonacci’s retracement understand that the Fibonacci sticks are that one does not have to place limited orders at the Fibonacci levels. Understanding the Japanese pattern is very crucial for trading with Fibonacci Retracement tool, these patterns provide insights with depth and make a trader smart. The tool when used along with the trend lines and resistance and support levels allows a trader to develop profit

churning strategies. Best and most common Fibonacci retracements are 38.2% and 61.8%, these values often get round of as 38% and 62%. Fibonacci retracement provides inputs regarding the resistance-support levels. One has to use both of the entities, the tool, and the candlestick to earn sound and trade effectively, Japanese Candlesticks is a broad concept which should be studied and leaned well, once the patterns and nomenclature are learned, using the tool along with the pattern will become easy.

Using Fibonacci Extensions to know when to take Profit

To understand the use of Fibonacci Extensions to identify the right time to take Profit, let us take help of an example: In the case of an uptrend, taking profit on a long trade is depends on Fibonacci Price Extensions Level.

This level can be determined in these steps:

  • First, check the most recent swing high and crucial Swing low, and click any one of the retracement levels.
  • Then, you will get the Price Extension Levels displaying both the corresponding price and ratio levels.

You remember the example of the previous lesson right. Let’s take help of that. The 50.0% Fib level held sturdily as provision and, after testing it thrice, the pair finally recommenced its uptrend. In the chart above the price rise above the earlier Swing High.

Use of Fibonacci extension levels in a downtrend.

In a downtrend, generally, traders take profit on a short trade at a Fibonacci extension. Let’s reconsider that downtrend on the 1-hour EUR/USD chart we mentioned in the Fib Sticks lesson. Purchasers could not step forward the 61.8% Fib.  Traders jumped back in and taken price back down to check recent lows. We can use Fib Extension to identify the good places to take profit which we could have when we shorted at the 61.8% retracement level.

In case of reversed price from the Fibonacci retracement level:

Price found support = 38.2% level. Initial support= 50.0% level (then turned into an area of interest). The 61.8% level also turned into an area of interest, before value shot down to check the previous Swing Low. If you thoroughly check, you’ll realize that the 100% extension level also performed as support. We might have taken off profits = 38.2%, 50.0%, or 61.8% levels.  There is nothing like one correct way to do it, but practice will help to take better decisions of choosing Swing points. You need to use the Fibonacci extension tool to determine the strength of a trend.

Using Fibonacci Extensions to determine the stop to lose Less Money

To comprehend the use of Fibonacci Extensions to where to place trade stop to prevent loss apart from solely depending on the Fib levels, we must understand a few time tested methods. Technique 1: The right place for Stop is next to Fib Suppose you are planning to enter at = 38.2% (Fib Level). Then stop should be at= 50.0%. If you are confident about 50.0% level, then feel free to set it at 61.8% and keep changing depending on your trust. Do you remember the 4 hour chart (EUR/USED) of Fibonacci retracement article? Let’s get a look again:

This method is all about believing that a certain percentage level would hold as a resistance point. Technique 2: Place Stop Past Current Fluctuation of High/Low This technique is a bit safer way. It means when you are in a long trade you can place the stop loss beneath the recent Swing low to get the support level. But the price should be in an uptrend during this. And during the downtrend, place stop loss higher than Swing high, but it is only valid if you are in a short position.

How to choose the right way?

The fact is you need to blend your experience, understand about the tools, ongoing market analysis to get the right Stop Loss point for you. Don’t rely blindly on Fibonacci levels as the foundation of stop loss placement because it’s not a sure thing. Combine all the available tools and turn it in your favour.

Conclusion: Fibonacci Trading

The Fibonacci retracement levels that you should keep an eye on are 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. The levels that generally hold the most weight in the market are 38.2%,50%, and 61.8% levels. Most of the forex charting software have these levels set to default settings. Since these retracement levels are considered an area of resistance or support by a majority of the forex traders, these can turn into a self-fulfilling prophecy which is why you should be careful of fake movements in the market as well.The Fibonacci extension levels, like the Fibonacci retracement levels, are 38.2%, 50.0%, 61.8% along with 100%, 138.2% and 161.8%. These Fibonacci extension levels are used by traders to determine the level of resistance and support which can help set profit targets on the forex of your choice.

Since a lot of traders are observing these levels closely and setting their targets using this algorithm, they can lead to be the trend themselves causing you problems. This is why you should also keep the sentiment of the market in mind when setting targets and trading. Before you can apply Fibonacci levels to your charts, you need to identify the Swing low and swing high points. A swing low is a peak with a minimum of two higher lows on both its sides. On the other hand, a swing high is a peak with a minimum of two lower highs on both its sides. All these tools can be used to spot entry and stop loss points.

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