Practical Fibonacci Methods For Forex Trading.pdf

Practical Fibonacci Methods

For Forex Trading

By Ken Marshall

and

Rob Moubray

Contents

Introduction to Fibonacci Numbers ------------------------------ 3

Trading the Fibonacci Levels ------------------------------ 4

Fibonacci Convergence ------------------------------ 8

Trade Examples ------------------------------ 9

Stop Loss ------------------------------ 26

Conclusion ------------------------------ 31

Disclaimer ------------------------------ 31

Introduction to Fibonacci Numbers.

The Fibonacci series of numbers are

1 , 1 , 2 , 3 , 5 , 8 , 13 , 21 , 34 , 55 , 89 , 144 ,È .,

The numbers are calculated simply by adding the two previous numbers together.

E.g. 3 + 5 = 8

5 + 8 = 13

8 + 13 = 21

etc

In forex, the Fibonacci ratios are used extensively to calculate targets for exit points and entry points for

trades. These Fibonacci levels are reliable as a large number of professional traders use them, and when

this happens the traders, in mass, drive the prices to these levels.

LetÓs look at how the ratios are derived.

Take four sequential Fibonacci numbers

Eg 13, 21, 34, 55

By dividing one number with another we get the ratios

13/21 = 0.618 or 61.8%

34/55 = 0.618 or 61.8%

34/21 = 1.618 or 161.8%

55/34 = 1.618 or 161.8%

21/55 = 0.382 or 32.8%

13/34 = 0.382 or 32.8%

The square root of 0.618 = 0.786

And the square root of 1.618 = 1.27

In Forex trading the key Fibonacci ratios are

0.382 38.2%

0.50 50%

0.618 61.8%

0.786 78.6% (76.4% is used on Metatrader charts 38.2 x 2 = 76.4% and 1- 34/144 =

0.764) (Price often bounces off an exact 76.4% retracement level and 76.4 is being

mentioned by various forex brokers)

1.27 127%

1.618 161.8%

2.618 261.8%

Trading the Fibonacci Levels:

Introduction:

The Fibonacci levels are a very powerful tool in trading forex. They can be traded in isolation or in

combination with other signals, for example candlesticks, indicators or chart patterns. In this book we

will use confirmation signals for entry and exit points. (Chart Patterns and Candlestick Patterns are

covered in more detail in ÐGuide to Profitable Forex Day TradingÑ which is available from

www.forextechniques.com).

Buy setups include bullish engulfing candlestick, morning star, tweezer bottom, double bottom and a

break of the high of an inside bar. Sell setups include bearish engulfing candlestick, evening star, tweezer

top, double top and a break of the low of an inside bar

The methodology will be demonstrated using real examples using charts and explanations.

One can apply these methods on any time frame from 5min charts through to weekly charts.

When putting Fibonacci levels on the charts, one must look back on each time frame for significant highs

and lows. This may involve looking back days and even weeks. There are traders trading all the different

time frames so Fibonacci lines drawn on weekly or monthly charts will affect the market. Convergence of

different Fibonacci levels may occur from levels placed on the different time frame charts. Where

convergence occurs, the levels become more significant. It is important to look for convergence with

Support and Resistance Levels and Trendlines.

Fibonacci Retracements

Retracement trading is safer than breakout trading .The main levels to watch are:

38.2%, 50%, 61.8% and 78.6%. (or 76.4%)

The market will typically retrace after a strong move before continuing .The market wonÓt always hit

these levels exactly. For example, price may reverse mid way between 50% and 61.8% sometimes. Price

can under shoot or over shoot a Fibonacci level .The 61.8% and 76.4% retracements are very popular

levels for the market to retrace to. Watch these levels on the different timescales. It is best to wait for a

confirmation signal at or close to point C before entering a trade. The difficult part about trading

Fibonacci retracements is knowing which level will hold.

For a buy, price should rise from a swing low at point A to a swing high at point B and retrace to

point C at a Fibonacci level. A swing low is a C bar turning point .The low of the middle bar is the lowest

point of the swing.

For a sell, price should drop from a swing high at point A to a swing low at point B and retrace up to

point C. Look for intra day highs and lows, daily highs and lows, 2 day highs and lows and 3-5day highs

and lows etc.

38.2%

50%

61.8%

50%

38.2%

Candlestick patterns are most reliable near Fibonacci levels and other support and resistance lines.

Candlesticks are also good for signaling the end of a retracement.

Double tops and double bottoms often appear at Fibonacci levels e.g. 61.8% retracement or the 1.382%

extension.

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