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Learn How to Crack the Fibonacci Code in 3 Simple Steps

By Gregory McLeod, Currency Analyst
10 October 2013 03:14 GMT

Talking Points

- Use Fibonacci tool by connecting the last swing low and last swing high to display 5 possible areas of support

- Look for price to turn at one of these 5 main levels before entering a trade for the best possible risk to reward

- Place a protective stop below next Fibonacci level and a limit at the 0.618 or 1.000 extensions

Have you ever seen a strong trending move in the market and wanted to be part of it but did not have the confidence to enter the trade?

Have you ever seen price just stop at a certain part of the chart and then turn around?

If you answered “Yes” to either one of these questions, then Fibonacci levels may be right for you.

Learn Forex: USD/CAD Fibonacci Retracement

3_Simple_Steps_for_Using_Fibonacci_to_Time_the_Forex_Market_body_Picture_2.png, Learn How to Crack the Fibonacci Code in 3 Simple Steps

(Chart Created using Marketscope 2.0 charts)

Very simply, Fibonacci are mathematical ratios that price pulls back to before resuming the trend. The four major Fibonacci retracement levels are: 0.236, 0.500, 0.618, and 0.786. After price pulls back and bounces from one of these levels, price usually moves up to one of four major Fibonacci extension levels; 0.618, 1.000, 1.27, and 1.618. To keep things simple, I will not go into how these are mathematically derived.

In the above example, notice how USD/CAD made a strong move up and then began to pull back. By using the Fibonacci tools to connect the swing low with the swing high, hidden levels of potential support and potential price targets were revealed.

USD/CAD bounced sharply from 1.0280 at the 0.236 Fibonacci level. This is where Fibonacci traders would enter into the market long with a stop just below the 0.382% Fibonacci support level. USDCAD went on to hit the first target was hit at 1.0350 which coincided with the 0.618 extension and then hit the 1.00 target of 1.0397.

Learn Forex: EURAUD Short Entry Using Fibonacci

3_Simple_Steps_for_Using_Fibonacci_to_Time_the_Forex_Market_body_Picture_1.png, Learn How to Crack the Fibonacci Code in 3 Simple Steps

(Chart Created using Marketscope 2.0 charts)

Using the same method, Fibonacci levels can identify, ahead of time, potential levels of resistance. These levels can be used to enter a trade in a downtrend with more confidence that price has turned from an area watched by hundreds of traders. In the example above, EUR/AUD is clearly in a downtrend.

But as with all downtrends, price retraces upward. Rather than chasing the market, the savvy Fibonacci traders can have these levels of potential resistance drawn days ahead on their charts and wait patiently for price to come to them.

Patience is rewarded as the EUR/AUD advance was stopped at the 0.618 Fibonacci resistance level. Forex Fibonacci traders would place a stop just above the 0.786 Fibonacci level with a target at the 0.618 extension.

By following these simple steps, traders can now find high probability reversal areas using Fibonacci retracements to enter into trends with confidence.

--- Written by Gregory McLeod, Trading Instructor

To contact Gregory McLeod, email gmcleod@dailyfx.com. Follow me on Twitter @gregmcleodtradr.

This piece provided you with the 3 simple steps to use Fibonacci to find low risk, high probability trade entries. Expand your learning with additional Fibonacci trade examples by enrolling in a short 20-minute course called Trading with Fibonacci Retracementscreated by our very own DailyFX Edu Instructors. It is absolutely free!

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10 October 2013 03:14 GMT