Fibonacci with Support & Resistance
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CHAPTER 9. SECRETS OF FIBONACCI
Topics Covered 1. What is Fibonacci 2. Fibonacci Retracements 3. Dynamic Support & Resistance 4. Adding Moving Averages on MT4
© Copyright World Currency Traders, LLC All Rights Reserved
Page 1
Understanding Fibonacci Fibonacci Forex trading is the basis of many Forex trading systems used by a great number of professional Forex brokers around the globe, and many billions of dollars are profitable traded every year based on these trading techniques. Fibonacci was an Italian mathematician and he is best remembered by his world famous Fibonacci sequence, the definition of this sequence is that it’s formed by a series of numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8, 13... But in the case of currency trading what is more important for the Forex trader is the Fibonacci ratios derived from this sequence of numbers, i.e. .236, .50, .382, .618, etc. These ratios are mathematical proportions prevalent in many places and structures in nature, as well as in many manmade creations. Forex trading can greatly benefit from this mathematical proportions due to the fact that the oscillations observed in Forex charts, where prices are visibly changing in an oscillatory pattern, follow Fibonacci ratios very closely as indicators of resistance and support levels; maybe not to the last cent, but so close as to be really amazing. Fibonacci price points, or levels, for any Forex currency pair can be calculated in advance so that the trader will know when to enter or exit the market if the prediction given by the Fibonacci Forex day trading system he uses fulfills its predictions. Many people try to make this analysis overly complicated scaring away many new Forex traders that are just beginning to understand how the Forex market works and how to make a profit in it. But this is not how it has to be. I can’t say it's a simple concept but it is quite understandable for any trader once he or she has grasped the basics and has had some practice trading using Fibonacci levels along with other secondary indicators that will help to improve the accuracy of the entry and exit point for every particular trade.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 2
These ratios are called the "golden mean". These are the ratios you HAVE to know:
Fibonacci Retracement Levels: 0.236 (23.6%) 0.382 (38.2%) 0.500 (50.0%) 0.618 (61.8%) 0.764 (76.4%) Traders use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy. Fibonacci is one of the most common types of technical analysis. In order to apply Fibonacci levels to your charts, you'll need to identify High and Low points.
Understanding Fibonacci Retracements The first thing you should know about the Fibonacci tool is that it works best when the market is trending. The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 3
Using Fibonacci in an uptrend:
As you can see from the chart, the retracement levels are (23.6%), (38.2%), (50.0%), (61.8%), and (78.6%). Now, the expectation is that if it retraces from the recent high, it will find support at one of those Fibonacci levels because traders will be placing buy orders at these levels as price pulls back. The most respected levels tend to be the (38.2%), (50.0%) & (61.8%). Price pulled back right through the 23.6% level and continued to shoot down until it tested the 38.2% level but was unable to close below it. Clearly, buying at the 38.2% Fibonacci level would have been a profitable trade as it used that level as support 3 times in this example!
© Copyright World Currency Traders, LLC All Rights Reserved
Page 4
Using Fibonacci in a downtrend:
As you can see, we found our Swing High on and our Swing Low. The retracement levels are like always are (23.6%), (38.2%), (50.0%), (61.8%) and (76.4%). The expectation for a downtrend is that if price retraces from this low, it will encounter resistance at one of the Fibonacci levels because traders will be ready with sell orders there. The market did it to rally from the low finding resistance levels on its way up. In this example the (23.6%), (38.2%), (50.0%) all provided opportunities to profit if you would have sold the first time it reached these levels. The more the price retraces the better chance the trade will work out and provide even more profit. If you compare how far the market fell after reaching these 3 levels, we can see the (50.0%) Fibonacci retracement provided the most pips. One thing you should take note of is that price won't always bounce from these levels. For now, there's something you should always remember about using the Fibonacci tool and it's that they are not always simple to use! If they were that simple, traders would always place their orders at Fib levels and the markets would trend forever.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 5
When Retracements Break As mentioned prior support and resistance levels eventually break. Well, seeing as how Fibonacci levels are used to find support and resistance levels, this also applies to Fibonacci! While Fibonacci levels give you a higher probability of success, like other technical tools, they don't always work. You don't know if price will reverse at the 38.2% level before resuming the trend. Sometimes it may hit 50.0% or the 61.8% levels before turning around. Another common problem in using the Fibonacci tool is determining which Swing Low and Swing High to use. People look at charts differently, look at different time frames, and have their own fundamental biases. The bottom line is that there is no absolute right way to do so, especially when the trend on the chart isn't clear. Sometimes it becomes a guessing game and that is why you should not trade only off Fibonacci, but be able to combine it with various methods to strengthen your Forex trading strategy.
Fibonacci with Support & Resistance Using Fibonacci levels can be very subjective. However, there are ways that you can help tilt the odds in your favor. While the Fibonacci tool is extremely useful, it shouldn't be used all by it lonesome self. The Fibonacci tool should be used in combination with other tools. One of the best ways to use the Fibonacci tool is to spot potential support and resistance levels and see if they line up with Fibonacci retracement levels. If Fib levels are already support and resistance levels, and you combine them with other price areas that a lot of other traders are watching, then the chances of price bouncing from those areas are much higher.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 6
Below is an example of how to match support or resistance levels to your Fibonacci retracement levels:
Notice on the way down price found support at the green line, where the 50.0% retracement level also is. After support is broken it can become resistance, as it did in this case. By selling at this level, traders would have significantly profited as the price came back down near the original low. You can do the same setup on an uptrend as well. The point is you should look for price levels that seem to have been areas of interest in the past. If you think about it, there's a higher chance that price will bounce from these levels. Why? First, previous support or resistance levels would be good areas to buy or sell because other traders will also be eyeing these levels like a hawk. Second, since we know that a lot of traders also use the Fibonacci tool, they may be looking to jump in on these Fib levels themselves. With traders looking at the same support and resistance levels, there's a good chance that there are a ton of orders at those price levels.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 7
While there's no guarantee that price will bounce from those levels, at least you can be more confident about your trade. After all, there is strength in numbers! Remember that trading is all about probabilities. If you stick to those higher probability trades, then there's a better chance of coming out ahead in the long run.
Using Fibonacci with Trend Lines Another good tool to combine with the Fibonacci tool is trend line analysis. After all, Fibonacci levels work best when the market is trending. Remember that whenever a pair is in a downtrend or uptrend, traders use Fibonacci retracement levels as a way to get in on the trend. So why not look for levels where Fib levels line up right smack with the trend? Here's a 4-hour chart of GBP/USD. As you can see, price has been respecting this downward trend line over a period of time.
You think to yourself, "Hmm, that's a nice downtrend right there. I want to get in on this trend and sell, even if it's just for a short-term trade. I think I'll sell once the pair hits the trend line again."
© Copyright World Currency Traders, LLC All Rights Reserved
Page 8
Before you do that though, why don't you reach for your Forex toolbox and get that Fibonacci tool out? Let's see if we can get a more exact entry price.
Here we plotted the Fibonacci retracement levels by using the Swing Low and Swing High. Notice how the 23.6% Fib level is intersected by the downward trend line. In this example we do see our short-term sell of allowing profit to be made before heading higher. Now if you recall price retraces there is a better chance of your trade working. If this trend line actually intersected the 38.2%, 50.0% or even better the 61.8%, we could expect that level to be even a stronger resistance level. The combination of both a diagonal and a horizontal support or resistance along with Fibonacci retracement levels could mean that other traders are eying those levels as well. Take note though, as with other drawing tools, drawing trend lines can also get pretty subjective.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 9
You don't know exactly how other traders are drawing them, but you can count on one thing - that there's a trend! If you see that a trend is developing, you should be looking for ways to trade in the direction of the trend to give you a better chance of a profitable trade. You can use the Fibonacci tool to help you find potential entry points.
SUMMARY The key Fibonacci retracement levels to keep an eye on are the 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. The ones that seem to hold the most weight are the 38.2%, 50.0%, and 61.8% levels. These are normally included in the default settings of any Fibonacci retracement software. Traders use the Fibonacci retracement levels as potential support and resistance. Since plenty of traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels may become a self-fulfilling prophecy. In order to apply Fibonacci levels to your charts, you'll need to identify High and Low points. Because many traders use the Fibonacci tool, those levels tend to become self-fulfilling support and resistance levels or areas of interest. When using the Fibonacci tool, probability of success could increase when using the Fib tool with other support and resistance levels, trend lines, and candlestick patterns for spotting entry and stop loss points. Since the market is always moving, these Fibonacci levels change as new highs and lows are broken. Professional traders normally use software that automatically calculates this information for you, allowing them to focus more on trading than calculating these retracement levels.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 10
Insider Tip’s 1. Fibonacci Retracements – Best when used on longer time frames because of the stronger support/resistance.
Risks Involved 1. Using Fibonacci – While Fibonacci levels give you a higher probability of success, like other technical tools, they don't always work. You don’t know if the price will stop at the 38.2%, 50% or even 61.8%.
Action Steps 1. Draw Fibonacci retracements on 3 different currency pairs using a 1-hour chart.
2. Take 3 trades using the Fibonacci retracement levels using 20 PIP stop losses & 20 PIP take profits.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 11
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CHAPTER 9. SECRETS OF FIBONACCI
Topics Covered 1. What is Fibonacci 2. Fibonacci Retracements 3. Dynamic Support & Resistance 4. Adding Moving Averages on MT4
© Copyright World Currency Traders, LLC All Rights Reserved
Page 1
Understanding Fibonacci Fibonacci Forex trading is the basis of many Forex trading systems used by a great number of professional Forex brokers around the globe, and many billions of dollars are profitable traded every year based on these trading techniques. Fibonacci was an Italian mathematician and he is best remembered by his world famous Fibonacci sequence, the definition of this sequence is that it’s formed by a series of numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8, 13... But in the case of currency trading what is more important for the Forex trader is the Fibonacci ratios derived from this sequence of numbers, i.e. .236, .50, .382, .618, etc. These ratios are mathematical proportions prevalent in many places and structures in nature, as well as in many manmade creations. Forex trading can greatly benefit from this mathematical proportions due to the fact that the oscillations observed in Forex charts, where prices are visibly changing in an oscillatory pattern, follow Fibonacci ratios very closely as indicators of resistance and support levels; maybe not to the last cent, but so close as to be really amazing. Fibonacci price points, or levels, for any Forex currency pair can be calculated in advance so that the trader will know when to enter or exit the market if the prediction given by the Fibonacci Forex day trading system he uses fulfills its predictions. Many people try to make this analysis overly complicated scaring away many new Forex traders that are just beginning to understand how the Forex market works and how to make a profit in it. But this is not how it has to be. I can’t say it's a simple concept but it is quite understandable for any trader once he or she has grasped the basics and has had some practice trading using Fibonacci levels along with other secondary indicators that will help to improve the accuracy of the entry and exit point for every particular trade.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 2
These ratios are called the "golden mean". These are the ratios you HAVE to know:
Fibonacci Retracement Levels: 0.236 (23.6%) 0.382 (38.2%) 0.500 (50.0%) 0.618 (61.8%) 0.764 (76.4%) Traders use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy. Fibonacci is one of the most common types of technical analysis. In order to apply Fibonacci levels to your charts, you'll need to identify High and Low points.
Understanding Fibonacci Retracements The first thing you should know about the Fibonacci tool is that it works best when the market is trending. The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 3
Using Fibonacci in an uptrend:
As you can see from the chart, the retracement levels are (23.6%), (38.2%), (50.0%), (61.8%), and (78.6%). Now, the expectation is that if it retraces from the recent high, it will find support at one of those Fibonacci levels because traders will be placing buy orders at these levels as price pulls back. The most respected levels tend to be the (38.2%), (50.0%) & (61.8%). Price pulled back right through the 23.6% level and continued to shoot down until it tested the 38.2% level but was unable to close below it. Clearly, buying at the 38.2% Fibonacci level would have been a profitable trade as it used that level as support 3 times in this example!
© Copyright World Currency Traders, LLC All Rights Reserved
Page 4
Using Fibonacci in a downtrend:
As you can see, we found our Swing High on and our Swing Low. The retracement levels are like always are (23.6%), (38.2%), (50.0%), (61.8%) and (76.4%). The expectation for a downtrend is that if price retraces from this low, it will encounter resistance at one of the Fibonacci levels because traders will be ready with sell orders there. The market did it to rally from the low finding resistance levels on its way up. In this example the (23.6%), (38.2%), (50.0%) all provided opportunities to profit if you would have sold the first time it reached these levels. The more the price retraces the better chance the trade will work out and provide even more profit. If you compare how far the market fell after reaching these 3 levels, we can see the (50.0%) Fibonacci retracement provided the most pips. One thing you should take note of is that price won't always bounce from these levels. For now, there's something you should always remember about using the Fibonacci tool and it's that they are not always simple to use! If they were that simple, traders would always place their orders at Fib levels and the markets would trend forever.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 5
When Retracements Break As mentioned prior support and resistance levels eventually break. Well, seeing as how Fibonacci levels are used to find support and resistance levels, this also applies to Fibonacci! While Fibonacci levels give you a higher probability of success, like other technical tools, they don't always work. You don't know if price will reverse at the 38.2% level before resuming the trend. Sometimes it may hit 50.0% or the 61.8% levels before turning around. Another common problem in using the Fibonacci tool is determining which Swing Low and Swing High to use. People look at charts differently, look at different time frames, and have their own fundamental biases. The bottom line is that there is no absolute right way to do so, especially when the trend on the chart isn't clear. Sometimes it becomes a guessing game and that is why you should not trade only off Fibonacci, but be able to combine it with various methods to strengthen your Forex trading strategy.
Fibonacci with Support & Resistance Using Fibonacci levels can be very subjective. However, there are ways that you can help tilt the odds in your favor. While the Fibonacci tool is extremely useful, it shouldn't be used all by it lonesome self. The Fibonacci tool should be used in combination with other tools. One of the best ways to use the Fibonacci tool is to spot potential support and resistance levels and see if they line up with Fibonacci retracement levels. If Fib levels are already support and resistance levels, and you combine them with other price areas that a lot of other traders are watching, then the chances of price bouncing from those areas are much higher.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 6
Below is an example of how to match support or resistance levels to your Fibonacci retracement levels:
Notice on the way down price found support at the green line, where the 50.0% retracement level also is. After support is broken it can become resistance, as it did in this case. By selling at this level, traders would have significantly profited as the price came back down near the original low. You can do the same setup on an uptrend as well. The point is you should look for price levels that seem to have been areas of interest in the past. If you think about it, there's a higher chance that price will bounce from these levels. Why? First, previous support or resistance levels would be good areas to buy or sell because other traders will also be eyeing these levels like a hawk. Second, since we know that a lot of traders also use the Fibonacci tool, they may be looking to jump in on these Fib levels themselves. With traders looking at the same support and resistance levels, there's a good chance that there are a ton of orders at those price levels.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 7
While there's no guarantee that price will bounce from those levels, at least you can be more confident about your trade. After all, there is strength in numbers! Remember that trading is all about probabilities. If you stick to those higher probability trades, then there's a better chance of coming out ahead in the long run.
Using Fibonacci with Trend Lines Another good tool to combine with the Fibonacci tool is trend line analysis. After all, Fibonacci levels work best when the market is trending. Remember that whenever a pair is in a downtrend or uptrend, traders use Fibonacci retracement levels as a way to get in on the trend. So why not look for levels where Fib levels line up right smack with the trend? Here's a 4-hour chart of GBP/USD. As you can see, price has been respecting this downward trend line over a period of time.
You think to yourself, "Hmm, that's a nice downtrend right there. I want to get in on this trend and sell, even if it's just for a short-term trade. I think I'll sell once the pair hits the trend line again."
© Copyright World Currency Traders, LLC All Rights Reserved
Page 8
Before you do that though, why don't you reach for your Forex toolbox and get that Fibonacci tool out? Let's see if we can get a more exact entry price.
Here we plotted the Fibonacci retracement levels by using the Swing Low and Swing High. Notice how the 23.6% Fib level is intersected by the downward trend line. In this example we do see our short-term sell of allowing profit to be made before heading higher. Now if you recall price retraces there is a better chance of your trade working. If this trend line actually intersected the 38.2%, 50.0% or even better the 61.8%, we could expect that level to be even a stronger resistance level. The combination of both a diagonal and a horizontal support or resistance along with Fibonacci retracement levels could mean that other traders are eying those levels as well. Take note though, as with other drawing tools, drawing trend lines can also get pretty subjective.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 9
You don't know exactly how other traders are drawing them, but you can count on one thing - that there's a trend! If you see that a trend is developing, you should be looking for ways to trade in the direction of the trend to give you a better chance of a profitable trade. You can use the Fibonacci tool to help you find potential entry points.
SUMMARY The key Fibonacci retracement levels to keep an eye on are the 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. The ones that seem to hold the most weight are the 38.2%, 50.0%, and 61.8% levels. These are normally included in the default settings of any Fibonacci retracement software. Traders use the Fibonacci retracement levels as potential support and resistance. Since plenty of traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels may become a self-fulfilling prophecy. In order to apply Fibonacci levels to your charts, you'll need to identify High and Low points. Because many traders use the Fibonacci tool, those levels tend to become self-fulfilling support and resistance levels or areas of interest. When using the Fibonacci tool, probability of success could increase when using the Fib tool with other support and resistance levels, trend lines, and candlestick patterns for spotting entry and stop loss points. Since the market is always moving, these Fibonacci levels change as new highs and lows are broken. Professional traders normally use software that automatically calculates this information for you, allowing them to focus more on trading than calculating these retracement levels.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 10
Insider Tip’s 1. Fibonacci Retracements – Best when used on longer time frames because of the stronger support/resistance.
Risks Involved 1. Using Fibonacci – While Fibonacci levels give you a higher probability of success, like other technical tools, they don't always work. You don’t know if the price will stop at the 38.2%, 50% or even 61.8%.
Action Steps 1. Draw Fibonacci retracements on 3 different currency pairs using a 1-hour chart.
2. Take 3 trades using the Fibonacci retracement levels using 20 PIP stop losses & 20 PIP take profits.
© Copyright World Currency Traders, LLC All Rights Reserved
Page 11
