📊 What is Fibonacci Trading?
Fibonacci trading uses mathematical ratios (23.6%, 38.2%, 50%, 61.8%) to identify potential support and resistance levels. It's one of the most popular technical analysis tools used by professional traders.
Introduction to Fibonacci Trading
Fibonacci retracements are based on the Fibonacci sequence, a mathematical pattern found throughout nature. In trading, these ratios help identify where price might reverse or continue after a significant move.
Why Use Fibonacci?
- High Probability Levels: Price often respects Fibonacci levels
- Works on All Timeframes: From scalping to position trading
- Combines Well: Works with support and resistance and trend analysis
- Clear Entry Points: Provides specific price levels for entries
Key Fibonacci Levels
The most important Fibonacci retracement levels are:
- 23.6% - Shallow retracement (strong trend)
- 38.2% - Common retracement level
- 50% - Psychological level (not a true Fibonacci ratio, but widely used)
- 61.8% - Golden ratio (most important)
- 78.6% - Deep retracement (trend may be reversing)
How to Draw Fibonacci Retracements
Step 1: Identify the Trend
First, identify a clear trend using trend following strategies:
- Uptrend: Higher highs and higher lows
- Downtrend: Lower highs and lower lows
Step 2: Find the Swing High and Low
- For Uptrend: Draw from swing low to swing high
- For Downtrend: Draw from swing high to swing low
Step 3: Apply Fibonacci Tool
Most trading platforms (like MT5) have built-in Fibonacci tools. Simply:
- Click the Fibonacci retracement tool
- Click on the swing low
- Drag to the swing high (or vice versa for downtrends)
Trading with Fibonacci Retracements
Buy Setup (Uptrend Retracement)
- Identify uptrend using price action
- Wait for price to retrace to 38.2% or 61.8% level
- Look for candlestick patterns showing reversal
- Enter long with stop loss below 78.6%
- Target previous high or Fibonacci extension levels
Sell Setup (Downtrend Retracement)
- Identify downtrend
- Wait for price to retrace to 38.2% or 61.8% level
- Look for bearish reversal signals
- Enter short with stop loss above 78.6%
- Target previous low
Fibonacci Extensions
Fibonacci extensions help identify profit targets beyond the original swing:
- 127.2% - First extension target
- 161.8% - Golden ratio extension (most important)
- 200% - Double the move
- 261.8% - Deep extension
Combining Fibonacci with Other Tools
Fibonacci + Support/Resistance
When Fibonacci levels align with support and resistance levels, the probability of a reversal increases significantly.
Fibonacci + Trend Lines
Combine Fibonacci with trendline analysis for stronger signals.
Fibonacci + Indicators
Use with RSI or MACD to confirm signals.
Common Fibonacci Trading Mistakes
- Drawing Incorrectly: Not using proper swing highs/lows
- Ignoring Context: Using Fibonacci in choppy markets
- Too Many Levels: Focusing on all levels instead of key ones (38.2%, 61.8%)
- No Confirmation: Entering trades without additional signals
- Wrong Timeframe: Using Fibonacci on too small timeframes
Fibonacci Trading Checklist
Before entering a Fibonacci trade:
- [ ] Identified clear trend
- [ ] Drawn Fibonacci from proper swing points
- [ ] Price approaching key level (38.2% or 61.8%)
- [ ] Confirmation signal (candlestick pattern, indicator)
- [ ] Stop loss set below/above 78.6%
- [ ] Risk/reward ratio at least 1:2
- [ ] Position size calculated using risk management rules
Summary
Fibonacci trading is a powerful tool when used correctly. It works best in trending markets and when combined with other technical analysis methods.
Key Takeaways:
- Use 38.2% and 61.8% as primary levels
- Always draw from proper swing points
- Combine with other analysis tools
- Use proper risk management
- Works on all timeframes