Fibonacci Levels Forex Trading Strategy
Fibonacci retracements are important levels that traders use to enter and exit the trades, put stop loss and take profit, determine new support and resistance levels, etc. The Fibonacci retracements are based on Fibonacci numbers and the Golden ratio, developed by an Italian mathematician Leonardo Fibonacci.
There are many types of Fibonacci tools that you can use in your trading. Two of the most popular tools are mentioned below:
The Fibonacci tools mentioned above have their own benefits and uses.
1- Fibonacci Retracements:
With the Fibonacci retracement tool, you can draw horizontal lines on the price chart, with each line representing an important support or resistance level. Trading platforms come with built-in Fibonacci retracement tools. To draw Fibonacci retracement levels, you should first display an uptrend or a downtrend on the price chart. If the chart shows an uptrend, select the highest price level on a candlestick and click and drag the cursor to draw the horizontal retracement levels. Conversely, in a downtrend, select the lowest price on the candlestick and drag the cursor upward to create horizontal retracement lines.
The horizontal lines created will show important levels of support and resistance, which you can use to enter and exit the trade. The price usually retraces from these levels, and hence the name retracement levels.
2- Fibonacci arcs:
Fibonacci arcs work the same way as the Fibonacci retracements do. The difference is that instead of horizontal lines, arcs are created on a price action chart, and the arcs represent important price levels. Many trading terminals allow you to create Fibonacci arcs with the help of built-in tools.
To create Fibonacci arcs on a price action chart, select the Fibonacci arc and choose two points: a swing high and a swing low. Connect the two lines with a line, and you will see semi-circles created along the path of the line. You will notice that the price pulls back and bounces off of these crucial levels most of the time, allowing you to make your strategy accordingly.
Trading while keeping in view the critical support and resistance levels can really help your trading. The market respects these levels, and the Fibonacci tool provides you an easy method to find those critical levels for trading intraday, swing trading, or long-term trading. As you learn more about different tools, you can then use Fibonacci tools in conjunction with other tools to determine where to put your stop loss and take profit points and do successful trades.