Fibonacci Levels in Forex

Using Fibonacci Levels is the cornerstone of many successful forex traders’ systems and it is based on centuries old mathematical techniques that can be applied to almost everything in nature. The numerous Forex trading systems based on this “Fibonacci numbers sequence” result in billions of dollars in profit annually by traders worldwide, and indeed, after trading Forex for a few years, I have come to use them myself every chance I get.

I’ve learned that the ratio between numbers in the Fibonacci sequence that is significant, rather than the actual numbers in the sequence.

The definition of this Fibonacci sequence is basically formed by a series of numbers where each number is the sum of the two preceding numbers; for example: 1, 1, 2, 3, 5, 8, 13.

Quite simply, the a pair will move up, stop at a point, move back down to another point, “pivot” off of that price and the process continues forever. These “oscillations” in the price of currency pairs are clear indicators of support and resistance. Support occurs when a pair begins to be bought after a move down, and resistance occurs when a pair begins to be sold after a move up. Now, admittedly, these moves occur many times per second, but we should be concerned with support and resistance on longer time frames. Fibonacci levels, when drawn correctly, can be excellent indicators (on almost any time frame) of where a price might go next,

But, you needn’t think this is some sort of magical formula just yet. I’m not expert enough, but it seems as if somewhere along the line, most traders (big and small) learned to trade using Fib’s (not all, but most), so it’s sort of like everyone in the market is trading together, making money (if they are “in tune” with movements between fib targets) . When a certain level is about to be reached, anyone long with almost certainly go short if they are trading fibs, so you can “hop” on the wagon and trade these targets with them. It’s no rocket science and it certainly isn’t foolproof, or “news proof.”

Forex Traders are concerned majorly with the numbers in the sequence: .236, .50, .382, .618, etc. Most of today’s foreign currency trading software come with the ability to draw the aforemention levels in with some sort of drawing tool. MetaTrader4 has a few plugins that draw fib targets, fib levels, etc. in automatically without having to draw anything.

Drawing Fib Levels is quite simple in MetaTrader4 (and other software). Even though I see alot of people draw the start and end point of their fib grid on the the absolute high or low in a price wave, this theoretically isn’t the optimal starting point for a grid. Instead, it seems Fibonacci targets are more accurate when drawn near areas where price action was “busier” near the high and low of a wave. You can see the example to the right that the targets are almost perfectly reached this way, otherwise, the levels would have been 20-30 pips higher and lower in each direction, making the system much less accurate.

If Fibonacci ratios describe the relationship between trend and countertrend markets, the 38%, 50% and 62% retracements form the primary pullback levels can be applied after a trend in either direction is over to help predict the extent of eventual countertrend swing.

1. Stretch a grid over the most obvious up or down wave, and see how percentages cross key price levels.
2. First Rise/First atrocity marks the first 100% retracement of a trend within your time frame of activity.
3. It provides an early adaptation warning after a new high or low.
4. The 100% retracement violates the major price direction and terminates the trend it corrects.
5. From this level, the old trend can re-create itself if it breaks through the old 38% level.
6. More often, traders will use that level to enter low-risk positions against the old trend.
7. Parabolic movement tends to occur between the 0%-to-38% and 62%-to-100% Fibonacci levels in all trends providing a great method for etnering big moves.
8. Sideways action may occur between 38% or 62% level.
9. Then use a simple escape or breakdown approach when price breaks out either way.
10. This next movement may likely move to an old high or low.