In 13th Century Italy, a mathematician called Leonardo Fibonacci discovered that many elements in our daily lives follow a predictable sequence.
Traders use the same numbers to plot sequential levels of support and resistance following reversals from previous trends.
Before we look at Fibonacci we would like to remind you that CFD’s and FX are leveraged products and your capital is at risk. These products may not be suitable for all investors and we encourage you to read the Risk Warning on the Valutrades website.
The use of Fibonacci can be quite simple or quite complex and can be used for spotting support and resistance levels or used to confirm stop/loss positions.
Fibonacci Retracements are a form of technical analysis that is used so frequently by large institutions that it is almost a self-fulfilling prophesy.
Before we start, we need to identify a trend from beginning to end.
For example, on this AUDJPY 30 minute chart we see a swing low here and a swing high here, identifying a large bear run.
Click on the “Fibonacci” button on your toolbar and click, drag and drop a line between the two points.
If, you see what I see here, lines and figures in yellow as is the MT4 default, and conflicting with your chart background colour, simply right click on the chart, select “Objects List”, select “Fibo” and “Edit”.
You may now change the colour to something more suited to your chart background.
So, using Fibonacci sequencing it was established that key levels of retracement occur at 23.6%, 38.2%, 50%, 61.8%, 100% of course and, should price break through, Fibonacci Extensions would occur at 161.8%, 261.8% and 423.6%.
OK, we have charted a bear run and, using the guidelines for the Fibonacci retracement, we see that price did, in fact, return and bounce off the 50% level and again off the 61.8% level.
It also used the 38.2% level as a level of support.
If we extend these lines, we can look back and see that these levels of support and resistance repeated themselves in previous price action with this support at 23.6% and these clear zones of supply and demand in the 50% area.
Traders may use these levels and trade them as normal support and resistance and, of course, it is always a good idea to look for confirmation with other indicators.
For example, using stochastics, we can see where overbought became oversold and vice versa, from these bounces off Fibonacci levels.
This sharp move to the upside hit resistance at the 61.8% level and could not break through.
So, entering on this confirmation, placing a stop/loss at or around this Fibonacci level and placing a take profit at either Fibonacci support level would have been a good trade.
If we look at this one hour chart on GBPUSD we can plot the Fibonacci levels off this big move to the upside and we can clearly see that, if we scroll forward, these levels of support and resistance are repeated many times.
This includes acting as a neckline for this double top which closed exactly at the 23.6% Fibonacci level.
Another clear example is this hourly chart on Gold.
Price found support at 23.6%, then again at 38.2%.
This line of support became the next line of resistance as price ranged between 61.8% and 38.2%.
If we change time frames we can see that the Fibonacci levels followed us to this 4 hour chart where, with patience, had we used stochastics we can spot some nice entry and exit points.
You can see the video here:
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