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3 Effective Ways of Using Fibonacci Tools

December 21, 2017 10:19

Dear traders,

Fibonacci retracement and extension are one of the most important trader's tools. Today, I will show you how to use it properly in three different ways.

Leonardo Bonacci aka Fibonacci

Leonardo Bonacci aka Fibonacci was born in Pisa around 1170 as the son of a wealthy merchant. He was an Italian mathematician considered the most talented western mathematician of the Middle Ages. His book Liber Abaci introduced the Hindu-Arabic numeral system.

Nowadays, Fibonacci levels are used in all types of trading including stocks, futures, commodities, cryptocurrencies, and also Forex. The Fibonacci levels, with its retracements and targets, are one of the best tools in the entire field of technical analysis.

Its strong Support & Resistance levels are exact and explicit. Most importantly, Fibonacci offers very defined and precise entry and exit spots.

The Fibonacci levels (or just Fibs) are derived from the Fibonacci sequence numbers.

Fibonacci Sequence Levels

The Fibonacci sequence numbers are: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, etc.

This series of numbers is created by always adding the last two numbers together:

0 + 1 = 1

1 + 1 = 2

1 + 2 = 3

2 + 3 = 5

3 + 5 = 8 etc.

If we apply it to higher numbers, we will still have the perfect sequence.

89 + 144 = 233,

144 + 233 = 377, etc.

You might be wondering why these Fibonacci sequence numbers are so significant.

There are multiple reasons:

1) The Fibonacci sequence numbers are strongly respected on the charts as a vast majority of traders use them.

2) The Fibonacci sequence levels are used for calculating Fibonacci retracements and Fibonacci targets, which are levels frequently used in the market.

3) These numbers are not only used in trading markets by the way but can, in fact, be observed all around us:

a) In crystal formations;

b) Played out in musical progressions;

c) In the growth of rabbit populations;

d) Even in the DNA spiral;

e) The whole human body itself is full of Fibonacci relationships.

Fibonacci Fan Strategy

The Fibonacci Fan is three lines set at the central Fibonacci retracement numbers. Those are:

38.2%

50.0%

61.8%.

Very often, the main supporting level on the Fibonacci Fan is the 61.8%. By applying the following rule, we might have a good chance for an entry purely based on Fibonacci Fan trading. Fibonacci Fan is the default indicator on MT4/MT5, and you can assess it directly.

Once the price breaks the 38.2% level, it will usually go to the 61.8% level. We make entry at 38.2, aiming for 61.8. This rule works best in a trending environment, but it can also be used in countertrend.

Source: USD/CAD H1 chart, Admiral Markets MT4, Nov-Dec 2018

Fibonacci Expansion Custom Levels

Fibonacci Expansion is a default tool available in MetaTrader, which is also crucial for price action target. This article will introduce the essential Fibonacci Expansion levels that you might want to use with different trading strategies. To be able to use the Fibonacci Expansion tool properly, I strongly recommend you to watch the video below.

Fibonacci Expansion Custom Levels

In order to add custom levels to the Fibonacci Expansion tool, you first need to select the tool from the drop-down menu in MetaTrader 4. This is how you do it:

Source: AM MT4, GBP/USD H1 chart, July 5, 2:20 platform time

Once you have selected the tool in Properties, add the following levels:

  1. FE 61.8
  2. FE 100.0
  3. FE 138.2
  4. FE 150
  5. FE 161.8
  6. FE 200

Please enter some of these levels manually within the indicator properties.

Source: AM MT4, GBP/USD H1 chart, July 5, 2:30 platform time

The characteristics of these levels are important for our price analysis and will add up to 1-2-3 pattern trading.

Fibonacci Expansion 61.8

This is the first important level of the tool. It doesn't usually act as a strong support or resistance when the price approaches it directly, but rather when the 61.8 support or resistance had already been broken (backward approach). It then transforms into a strong S/R level.

Fibonacci Expansion 100.0

This is considered to be a weak Support & Resistance level. If, for example, the 1-2-3 pattern point 3 equals or is close to 61.8 of 1-2 retracement, FE 100 should be a strong S/R level.

Fibonacci Expansion 138.2

This is a level similar to 61.8 FE, with very similar characteristics.

Fibonacci Expansion 150

A very strong S/R level, usually strong for USD crosses, where the USD is the base currency (e.g., USD/CHF, USD/JPY, USD/CAD, USD/SGD, etc.). It is also a strong level for EUR based crosses, where the EUR is the base currency (e.g., EUR/USD, EUR/GBP, EUR/JPY, etc.).

Fibonacci Expansion 161.8

A very strong S/R level that possibly marks the end of correction.

Fibonacci Expansion 200

Possibly the strongest S/R level that marks the end of correction, price reversal, and change of the trend.

Fibonacci 50.0 with the EMA channel

This strategy is easy to apply. It uses the following indicators:

  • EMA 15 set on Close (black)
  • EMA 50 set on High (blue)
  • EMA 50 set on Low (red)
  • Admiral Pivot set on Daily.
  • Time Frame: H1

    Long Entry Position

  • Check if the slope of the channel is sloping up;
  • The price needs to be above the channel;
  • Wait for a retracement;
  • Draw a Fibonacci Retracement of the last swing from the bottom to the top;
  • The price needs to touch or come close to 23.6, 38.2, and 50.0 Fibonacci level;
  • Place a long entry by scaling in (divide you total lot size in three separate entries).

    Short Entry Position

  • Check if the slope of the channel is sloping down;
  • The price needs to be above the channel;
  • Wait for a retracement;
  • Draw a Fibonacci Retracement of the last swing from the top to the bottom;
  • The price needs to touch or come close to 23.6, 38.2 and 50.0 Fibonacci level;
  • Place a short entry by scaling in (divide you total lot size on three separate entries).

Targets are placed at Admiral Pivots, while stop-loss is placed below the last swing low (for long trades) and above previous swing high (for short trades).

For example, you decided to enter with 0.3 lots. In order to scale in properly, you need to divide 0.30 lots by 3. So, you will add 0.10 when the price touches the 23.6, another 0.10 will be added at 38.2, and the final part of 0.10 will be added at 50.0 Fib if the price makes a retracement to all 3 Fibs. If the price doesn't make a retracement to 38.2 and 50.0, you will probably have only ⅓ of the trade running (23.6).

My deep technical research and trading experience have shown that profits can grow exponentially up and losses will be lower if you use the scaling-in technique.

Source: GBP/JPY H1 chart, Admiral Markets MT4SE, Nov-Dec 2017

If you have any questions or comments, please do not hesitate to ask me.

Cheers and safe trading,

Nenad


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