How to use Fibonacci Retracements correctly to make it Profitable

At the end of the forex trading day, there is no "Holy Grail," but the fact that an 800-year-old indicator works just as well today as it did centuries ago means there could be. In this article, we want to understand if this 13th-century mathematics tool can make you serious money today. In a word, yes. But, you've got to understand how to use Fibonacci Retracements in Forex to make it profitable...

Fibonacci Forex - Fibonacci Retracements

Fibonacci retracements provide a valuable kind of support and resistance information that other forex indicators don’t. As in any financial market, forex price trends don’t move in a straight line. Instead, trends move in a zigzagging pattern as they periodically retrace parts of their primary move and continue it, steadily testing progressive levels of support and resistance as they move higher or lower.

Fig. 1, EurUsd Daily Chart, Sep 2010 - Aug 2011

For example, in the period covered in the EurUsd Daily chart, Fibonacci retracements help us determine where prices are likely to either:

  • Make these repeated short-term reversals as they zigzag within their longer-term trend.
  • Make a longer-term reversal within an even longer-term trend or begin a longer-term reversal.


Fibonacci retracements are based on certain mathematical relationships, expressed as ratios, between numbers in a series, that were identified (at least for the Western world) by thirteenth-century mathematician Leonardo Fibonacci. They have applications in fields as diverse as biology, music, and art. You can read more about what is Fibonacci in Forex here, but we’ll stick to what’s relevant to trading.

Traders found that trends tend to retrace prior moves according to these same ratios, which in percentages come to 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent of a given trend. By drawing these percent retracements of a trend on their charts, they could better predict where future price moves might stall or reverse. That is, they found that when trends retrace they tend to retrace 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, or 100 percent of their prior move. It’s unclear why these ratios work, but they do, so they became widely accepted, thus strengthening their influence as markets accept them as likely s/r points.

For example, in figure 2, with Fibonacci Forex levels (horizontal lines) drawn for the range of the downtrend of 2009 to 2010. Note how well the Fibonacci retracements predict s/r as the price retraces that downtrend.

Continue reading for more information or start trading and notice the predictive power of Fibonacci retracements in the forex and stock market. Use code WELCOME20 at registration to get a free $20 welcome bonus.

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How to use Fibonacci Retracements Correctly

Because the application of technical indicators varies with forex trading platforms, we usually don’t cover how you insert a given indicator. With Fibonacci retracements, however, it’s worth reviewing the general mechanics of how you get them on your chart. So, where did these lines come from? How do you draw them?

Fig. 2, EurUsd Daily Chart, Nov 2009-Aug 2010

To use Fibonacci retracement correctly, you select a major high and low for the period in question. Your charting software divides that price range by the key Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent, and it draws horizontal lines at the prices that correspond to these percentages of that range. These price levels are where s/r levels are more likely to occur. Your charting software will describe the mechanics of this, which typically involve nothing more than the following procedure steps: Identify the price range to study.

For example, in Figure 2, we wanted to see the Fibonacci support and resistance points as the EURUSD rallied and retraced the downtrend of December 2009 to June 2010, highlighted by the dotted line on the left side of the chart. Select the Fibonacci retracements option.

To plot the Fibonacci retracements for an uptrend that occurs after a downtrend, you first need to define the range of the prior downtrend so that the charting software can calculate the percent retracement points that the new uptrend will hit as it retraces through the range of the prior downtrend.

  • To do that: Place your mouse cursor at the high point where the downtrend began, left click and hold the left mouse button down in order to drag the mouse cursor to the low point where the downtrend ends, then release the left mouse button. The fib retracements will appear. These serve as s/r points for the uptrend that follows. As price rises, each level it approaches is resistance until decisively breached, and then that level becomes support unless the price falls back below it.


To plot the Fibonacci retracements for a downtrend that follows an uptrend, you do the same thing. The only difference is that you first need to define the range of the prior uptrend so that the charting software can calculate the percent retracement points that the new downtrend will hit as it retraces through the range of the prior uptrend.

  • To do that: After selecting the Fibonacci Retracements option from your menu of technical indicators, place your mouse cursor at the low point where the uptrend began, left click and hold the left mouse button down in order to drag the mouse cursor to the high point where the uptrend ends, then release the left mouse button. The fib retracements will appear. These serve as s/r points for the downtrend that follows. As price falls, each level it approaches is supported until decisively breached, and then that level becomes resistance unless the price falls back below it. The software fills in the price levels that correspond to 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent of the price range you selected. 


More about Fibonacci Forex

Traders must choose the period to which they apply Fibonacci to Forex charts, so there is a degree of human judgment as to the range to which a given set of Fibonacci retracements will be applied. At any one time, millions of traders will be looking at different Fibonacci forex levels for different periods and time frames. So, it’s helpful to draw Fibonacci retracements for a time frame above and below the one from which you trade so that you can see both:

  • The longer-term s/r from longer-term Fibonacci Retracements that cover a wider price range and possibly a different trend altogether.
  • The shorter-term s/r from Fibs nested within your time frame that covers a narrower price range and possibly a different kind of trend.


For example, let’s say we wanted more information about likely s/r for the EURUSD downtrend from April to August 2011, as shown in Figure 2. We could draw another set of Fibs for the uptrend of February to May 2011 that occurred within the broader overall downtrend that began in late 2009 to early 2010, which would provide possible support points as the EURUSD retraced this uptrend lower.

Fig. 3, EurUsd Daily Chart, Nov 2010 - Aug 2011

The resulting Fibonacci Forex Retracements, in Figure 3, served as useful predictors of support and resistance during this downtrend. Like any support and resistance points, see them as center lines for bands or zones of support/resistance within which the candles cluster, rather than as precise points of support/resistance. Some retracement levels are stronger than others. The 23.6, 38.2, and 61.8 percent retracement levels tend to be stronger than the others. 

How to set up Fibonacci retracement levels in MetaTrader 4/5

This section shows you how to set up and customize Fibonacci retracement levels in MetaTrader 4/5.

To add the Fibonacci retracement indicator and set its parameters:

1. Click Insert and move your mouse over Fibonacci
2. Click Retracement

3. Click and hold where you want the Fibonacci to start
4. Move the mouse and when you have placed the Fibonacci, release the mouse

To customize the Fibonacci parameters:

1. Right-click anywhere on the chart area
2. Click on Objects List

3. Select Fibo
4. Click on Edit

Once you have completed the steps above, the parameters menu will appear.

When specifying many new Fibonacci levels, it is sometimes easier to delete all existing levels offered by default in MetaTrader 4/5. To do this, follow the steps below:

  • Go to the Fibo Levels tab
  • Select the level you want to delete
  • Click on Delete


Repeat these steps for every single standard Fibonacci level offered by default in your platform.

Once you have deleted all the default levels, choose whichever of the following levels are most useful to you:

Common:

(-%$ puts the actual price on the Fibonacci levels.)

To enter these new levels, follow the steps below:

1. Click Add
2. Enter the relevant level

3. Double-click on the description line, enter the relevant description and press the Enter key on your keyboard

4. After you have repeated steps number 1–3 for all levels you want to click OK.

To delete the Fibonacci retracement indicator:

1. Right-click anywhere on the chart area
2. Click on Objects List

3. Select Fibo
4. Click on Delete


As shown above, the Fibonacci retracement indicator will now disappear from your chart.

Final Words

Understanding how to use Fibonacci retracements correctly is important, but if you want some help, MetaTrader 5 AM Broker offers a useful Fibonacci tool and our trainers can provide you the right guidance. Use code WELCOME20 at registration to get a free $20 welcome bonus.

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