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Trading Fibonacci Collisions for Higher Probability Trades

Trading Fibonacci Collisions for Higher Probability Trades

Tyler Yell, CMT, Currency Strategist

Talking Points

  • The Value of Fibonacci Ratios
  • Using Converging Fibonacci Levels
  • An Example of Fibonacci Confluence with AUDNZD

“The proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it "the golden mean. “

William Hoffner, Dec. 1975 Smithsonian Magazine

Fibonacci is a wonder of nature. The ratio plays out in the DNA helix structure, the structure of strong hurricanes, and in the scale at which the Pyramids of Giza were built. So, why do traders use it?

Learn Forex: Fibonacci Spiral in Nature

The simple argument is that trading any market is comprised by free willed individuals. Fibonacci places natural limits to how excited or depressed a free-willed mechanism will expand. These are known as Fibonacci ratios, which the most common are 38.2%, 50%, 61.8%, 100%, 161.8%, etc. Therefore, you can look for a Fibonacci ratio to catch the expansion of price or the retracement of a move.

For a beginner’s look at trading with Fibonacci Retracements, click here to register for our free online Fibonacci course.

Using Converging Fibonacci Levels

Have you heard of the 3 best-non-kept secret to investing in Real-Estate? Location, Location, Location. The trading equivalent to the three steps of Real-Estate success is Confirmation, Confirmation, and Confirmation. The best way to do this is to find multiple arguments for the same trade idea. Because there are multiple ways to look use Fibonacci Ratios, you can look to the multiple Fibonacci tools on Marketscope 2.0.

Learn Forex: Access the Fibonacci Tools From the Chart

Presented by FXCM’s Marketscope Charts

The most commonly used tools are the Fibonacci Retracement and Fibonacci Expansion tools. Fibonacci Retracements help you do see if price moves against the trend only to an exhaust itself at a Fibonacci Ratio of 0.382%, 0.50%, 61.8%, or 78.6%. A Fibonacci retracement looks to the adjacent wave so that you’d look to wave 2 to exhaust at a Fibonacci retracement level to Wave 1 in Elliott Wave speak.

A Fibonacci Expansion tool on the other hand, can help you look to a Fibonacci Ratio multiple of a corresponding with-trend move. In other words, the Fibonacci expansion can help you to see if a currency pair finds exhaustion at a Fibonacci relationship. Therefore, you could look at two down-trends and see if the second downtrend hits a Fibonacci ratio level to the prior trend. Look at this great example that called the bottom of the AUDUSD in late January.

Learn Forex: Fibonacci Expansion

Presented by FXCM’s Marketscope Charts

A Fibonacci collision takes place, when a Fibonacci Level meets on two difference courses. This is sometimes known as confluence or cluster. This will often require you to take two different major ranges to see if price turns around at a meeting point of Fibonacci ratios based off these different ranges.

Learn Forex: Fibonacci Collision on AUDUSD Resulted in 850 Pip Rally

Presented by FXCM’s Marketscope Charts

An Example of Fibonacci Confluence with AUDNZD

Last night, The Reserve Bank of New Zealand raised interest rates and encouraged buyers by saying that inflation and rate hikes are likely to increase. This caused a major strengthening in the NZD across the board. This notably happened off a key Fibonacci retracement and expansion level.

Learn Forex: AUDNZD Fibonacci Collision

Presented by FXCM’s Marketscope Charts

When you begin to look for Fibonacci Collisions, you’ll be amazed to see how often these key levels can provide great targets or entries for FX traders. Feel free to reach out to me at my information below or reach me live in DailyFX on Demand with any questions about applying this in real-time. Also, now that you're armed with a method of finding technical targets, feel free to try this information out on a FREE Forex Demo Account with access to multiple markets.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.