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.