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How To Use Fibonacci Retracements In Your Trading

Friday, 14 November 2008 15:11:53 GMT  |  Wayne McDonell, Chief Currency Coach FxBootcamp

Leonardo Fibonacci studied ratios.  He should have been a forex trader.  We use his ratios to study pull-backs on all time frames; from 1 min to monthly charts and everything in between. 

What’s a pull-back?  It’s a retracement of price from the direction of your fundamental bias.  Let’s say you are bullish on a particular currency pair.  In this case, your fundamental bias is up.   The definition of an up trend is a series of higher highs and higher lows.  Therefore, by definition, price WILL fall in a rising market.  How far price falls is important.

 

I use Fibonacci studies to measure these pull-backs.  My ideal pull-back only retraces 38.2-61.4%.  If red candles turn green in this zone, I become bullish again and look for opportunities to buy.

Below are some examples from today. 

Figure 2 is the CAD/JPY 4 hour chart.  After rising back to the 200 EMA, the long term lagging indicator I use to judge “fair market value”, price begins to drop.  If I were bullish on this pair, I’m happy to see it drop.  I like to buy when price is low.

 

How to enter a Fibonacci Trade

Step 1.  Measure the distance between the swing high and low.

Step 2:  Wait for price to fall.  You can trade while it falls, but I prefer to only trade in the direction of my fundamental bias.

Step 3:   If price falls into the “fib zone” of 38.2% - 61.8%, get ready.

Step 4.  If price turns green, you may consider going long again.  Use of moving averages and oscillators are further levels of confirmation.

 

Figure 3 offers a great example.  There are two large bullish engulfing candles that formed on the psychological level of 1.4600.  This represents a nice reversal.  However, the “long opportunity” is not created at that bounce. 

If an uptrend is a series of higher highs and higher lows, we don’t have all the pieces in order yet.  All we have is a new higher high.  The conservative tactic is to not go long after you see big green candles.  The tactic is to buy the pair after a high low has been created.  This is especially attractive to see that higher low for exactly 61.8% from the swing high.

 

The next example from today was on this EUR/JPY 1 min chart.  I have illustrated a 50% fib retracement.  It’s a normal occurrence and happens dozens of times per day.  However, can you see any other Fibonacci retracements in this example?  Look at all the little swing highs and lows.  I bet you can find plenty of reasonable setups.

In the video, you will see how I set up Fibonacci retracements for trade opportunities in the live market.  Remember, if you are going to practice this methodology, do so on a demo account and do not trade real money until you have a track record of success.

 

Happy Pipping.

 

Best regards,

 

Wayne McDonell
Commodities Trading Advisor
Chief Currency Coach
http://www.fxbootcamp.com

Wayne McDonell is the Chief Currency Coach at FxBootcamp.com, a live forex training organization.  He is a member of the National Futures Association and registered as a Commodities Trading Advisor.  His book “Strategic & Tactical FOREX Trading” (Wiley Publishing) is a best seller in the Foreign Exchange category of Amazon.com.

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