[FOREX TIP] A brief overview of the Fibonacci retracements in forex

A brief overview of the Fibonacci retracements in forex

There is an old saying in the forex market that the trend is your friend and most of the professional traders in the financial industry execute their trade in favor of the long-term prevailing trend to reduce the risk exposure. But, executing your trend at the perfect place in favor of the trend is a little bit tricky and this is where the Fibonacci retracement tools come into play. Let’s get into more details of the Fibonacci retracement tools.

Fibonacci retracement

Fibonacci retracements are simple but very effective charting tools in the forex market that allow you to find the possible retracement levels in the market. The retracement levels are calculated based on Fibonacci series and most of the time the market respects this Fibonacci retracement levels and continue its movement in favor of the long-term prevailing trend in the market. Let’s see an example how the Fibonacci retracements help traders to find the best possible trade entries in favor of the long-term prevailing trend.

Figure: Use of Fibonacci retracement tools

From the above figure, you can see three important Fibonacci retracement levels drawn in the AUDUSD pair. Some of you might think how to draw these key retracement levels in the market. But there is no need to worry, since all the trading platforms come with a built-in Fibonacci retracement tool, so all you need to do is to find the key swings in the market. For instance, in the above figure, we have drawn the retracement levels from the key swing low to swing high in the market since it’s an uptrend. Similarly, for a downtrend, you need to draw the retracement levels of the key swing high to swing low in the market. Once you have the Fibonacci retracement levels, wait for trading signals at the major retracement levels to execute your orders with proper risk management factors. Please note that here we have shown you only the most reliable Fibonacci retracement levels, but you will also find other minor retracement levels in the market while you use Fibonacci levels.

Some important points to note for Fibonacci trading

Always trade the higher time frame

1. Execute the orders at 38.2 %, 50% or 61.8 % retracement levels
2. Use price action trading signals to enhance your winning edge
3. Always use predefined stop loss or trail your take profit level
4. Use only the key swing high and low

So, if you are thinking to become a professional Fibonacci trader then make sure that you always follow these important rules. No trading strategy is 100 percent accurate and even the long-term established trend in the market often gets changed. So make sure that you always use proper risk management factors to save your trading capital in the market. Unlike the novice traders, the professional traders always risk only a certain portion of their trading account so that they don’t have to worry about their loss if the trade takes the opposite direction.

Let’s see a losing trade in the market.

Figure: A clear break of 61.8 % retracement levels

From the above figure, you can clearly see that the price has broken the 61.8 percent retracement level, which clearly signifies a trend change in the market. However, you should not enter into the market right after the breach of .618 percent retracement level, rather you should wait for a strong bullish candle in the market to confirm the establishment of the new momentum in the market.

Summary: Trading the Fibonacci retracement levels is one of the most profitable and reliable systems in the forex market. Professional traders use the price action confirmation signal in the market to execute the trades at the key retracement levels in the market. When you trade these levels, make sure that you draw the retracement levels in the higher time frame or else you will not have high-quality trading signals. Always follow proper risk management factors in every single trade since it is considered to be the most important element for successful forex trading.

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