You might have heard of the Fibonacci Forex trading strategy, the method that allows modern currency traders to benefit from the principles of ancient math. Today we break down the Fibonacci method in Forex for anyone who would like to implement it in their trading.
Understanding Fibonacci trading
To correctly implement the Forex trading strategy using the Fibonacci sequence, we first need to understand its foundation. A 13th-century Italian mathematician Leonardo Pisano Bogollo has notices some peculiar patterns in the sequence he created. The sequence started with 0 and 1, with each following number being the sum of preceding two. Like this:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, and so on.
The interesting fact about the sequence is that if you divide any number within it by the previous number (except for 0 and 1) it will approximately match the number 1.618. 1.618 is a practically magical number also known as Phi, the Golden Ratio, and the Golden mean, and according to scientists, it connects math with biology, astronomy, and pretty much everything else in the world. But what does this have to do with Fibonacci trading strategy Forex currency?
Fibonacci methods for Forex trading
Any Fibonacci retracement strategy bases on the ratios calculated from the famous sequence. To define a Forex retracement picture a temporary reversal in the overall, bigger trend. And the theoretical foundation behind the Fibonacci currency trading is that the retracement levels created by the sequence ratios perfectly serve as the levels of support and resistance.
To use the Fibonacci pattern in trading, you need to find the levels of 23.6%, 38.2%, 61.8%, and 78.6%. The 50% level is also used in this method, without it doesn’t have a relation to the Fibonacci sequence.
Forex trading strategy with Fibonacci retracement
With all the complex math aside, the idea of the Fibonacci retracement strategy Forex is quite simple. Same as with any other support and resistance strategy: in an uptrend you buy at support and sell at resistance, and vice versa.
As previously established the ratios calculated from the Fibonacci sequence often serve as the walls of the price corridor, which means they can be used effectively. Next, let’s discuss how to make Fibo retracement theory work for you specifically.
Fibonacci Forex trading techniques
Most of the Fibonacci Forex trading strategy lessons will confirm that although Fibo retracement is pretty self-efficient, it’s always good to back it up with additional techniques and indicators.
For instance, the popular indicator to use with Fibonacci is MACD. The conditions of a strategy would look like this: the price crosses a previously added 10-period MA and then the MACD crosses the histogram in the same direction, combined with Fibo levels stretched out forward in alignment with the preceding trend wave this creates a great set up.
How to make Fibo retracement
In order to implement any Fib retracement strategy, you have to master the Fibonacci tool in MT4. Luckily, Fibo is a highly popular instrument, so to add it to the chart, you have to follow the path: Insert, Fibonacci, Retracement. A plus sign will appear under the cursor, use it to mark the very first candle in the current wave and then the top/bottom one at the end of that first swing.
The retracement levels will appear on the chart. And if you need to add or remove any levels in accordance with your personal strategy, you can do it by right-clicking on the chart and selecting Fibonacci properties. There you will get the opportunities to adjust the parameters and the visualization of the tool on multiple charts, as well as interfere with parameters to match your preference.