The Fabulous Fibonacci Forex Method

[John Starks]

When you're short on time, you can always go Emeril Lagasse and "kick it up a notch." Forex is known for making people really poor, really fast. However, quick profits can be had for the disciplined trader. There is a school of thought that says that said quick profits are achievable by using "the Fibonacci method." The method, of course, gets its name from the Italian Mathematician Leonardo Fibonacci, but how does it work?

 

When To Use This Method

 

This type of trading is normally used when you want a trading session that is over five minutes but under four hours. Ideally, it should last less than three hours. You can use any currency pairs you want, but your weighted moving average (WMA) should be 5.

How To Use The Fibonacci Trading Method

 

You'll need to follow some basic forex trading rules. First, discover whether you are in an uptrend or downtrend. Then, figure out the highest and lowest swings in the chart formation. Finally, make the trend your friend by trading on it.

Fibonacci retracement tools help you determine your entry and exit points. When you use a retracement tool, you're trying to figure out how far will the price retrace and then reverse in the opposite direction. To get your retracement levels, you'll need to use a Fibonacci calculator. This will tell you levels for 0 percent retracement, 23.8 percent, 38.2 percent, 50 percent, and 61.8 percent.

To be safe, the price must touch 5 WMA. Typically, you'll want three retracement levels. However, the top-most retracement level must not fail. For example, if you had retracement levels of .382, .500, and .618, then you would not want the .618 level to fail. You'll also want to define extension levels so that you know when to take your profits. Set your stop order 4 to 5 pips above your retracement level in a downtrend and 4 to 5 pips below your retracement level in an uptrend.

Once you have your retracement and extension levels defined, you're ready to go. Buy in once the trend indicates that it will not break through your retracement level. Ride the wave all the way up to your extension level and sell.

Caution

 

Many forex traders are quantitatively inclined. However, when you trade based solely on technical analysis, you might be leaving out some important data (and information). Technical analysis does not account for political instability, major news events, and other information that can dramatically influence currency trends.

There is no one tool or method that will work 100 percent of the time. The theories about market movement, using technical analysis, are based on pure mathematical analysis. If the assumptions being made are wrong, then the trade will turn against you. Don't think for a minute that a trend means you're guaranteed profit. By the same token, don't ignore trends as meaningless. What's important is to assume that the Fibonacci sequence will work when the trend is already there in your favor. All this strategy will do is give you yet another way to determine entry and exit points so that you can set some type of rules for yourself. You should use Fibonacci expansion Levels as a way of estimating where the where the movement will eventually reach. Fibonacci expansion basically has two critical levels, firstly at 61.8% and secondly at 100% profit taking level. The purpose of these specific levels are solely aimed at where you should use the information to take a profit. From the example chart shown below Fibonacci expansion levels are plotted between points 1, 2 and then 3. Following the direction of Forex trend, on this example it is upward, the expansion is then also plotted upwards. You will note that the Fibonacci expansion levels are shown above the price , giving an indication of the profit taking areas. From the example used , working on Fibonacci expansion 100 , a healthy proft would have been generated. Good advice would be to practice your strategies and hone your skills in this area. You can do this by finding a Forex chart and plotting your way to a profit, something you should quickly be able to do in real time. Here is an example of Fibonacci expansion levels on an upward forex trend and you can also search out examples of how the strategy works on a downward trend, as the same principle applies of following a trend up or down.

Source: fxstreet.com