Advanced Fibonacci trading strategy
The Fibonacci trading strategy is very much popular among professional traders. Though there are many different kinds of trading strategies that you can follow but the expert traders always prefer the Fibonacci trading system since it allows them to trade in favor of the trend. There is an old saying in the forex market that says the trend is your friend. But when it comes to real life trading riding an existing trend is extremely difficult especially if you don’t have a solid knowledge of this industry. Most of the novice traders tend to trade against the prevailing trend and thus loses money in this industry. Today we are going to discuss the Fibonacci trading strategy which will allow us to execute high-quality trade just like the professional traders.
What are Fibonacci retracement tools?
The very first thing that you need to know about Fibonacci trading is the Fibonacci series. This is a simple mathematical series based on which the Fibonacci retracement tools have been based and developed. Some of you might be frustrated by hearing mathematical terms but don’t worry, the advanced coders have done all the hard work for you. Most of the trading platforms in today’s world use the Fibonacci retracement tools, which will automatically draw the Fibonacci retracement level automatically in your chart. You don’t need to learn rocket science – Just some simple knowledge about the key swings in the market is enough for you to place a high-quality trade at the important Fibonacci level.
How do we draw the Fibonacci retracement levels in the financial instrument?
Drawing the Fibonacci retracement levels on your trading chart requires clear knowledge about swing highs and lows. As a professional trader, you should look at the most recent swing (low and high) in order to draw Fibonacci retracement levels in an uptrend, and in case of downtrend, you will use the most recent high and lows of the market. A simple graphical illustration will give you a clear idea about this tool and its use.
Figure: Drawing the bullish retracement level by using the most recent swing low and high
In the above figure, you can clearly see that the professional Fibonacci traders have used the most recent swing (low and high) to find the bullish retracement of the financial asset. Since the market was in an uptrend, the trader has drawn the Fibonacci retracement level from bottom to top. But if it were in downtrend, we would have drawn it from top to bottom. And the green horizontal lines are the most important retracement levels where the traders execute their trades with proper money management factors. Never trade the market in the lower time frame by using this system. Most of the time, expert traders use the daily and weekly time frames in order to find the key retracement levels of the financial instrument. However, if you want to trade the lower time frame by using this system, you have to make sure that you do the multiple time frame analysis in order to filter the false trading signals.
Key Fibonacci retracement levels
Though there are many different Fibonacci retracement levels, most of the expert traders in the financial industry use the 38.2%, 50% and 618 % retracement level to trade the pair. Most of the time the market respects these three levels very much, but some conservative traders only trade the 61.8 % retracement level due to its extreme level of reliability.
How to trade the Fibonacci retracement levels.
The Fibonacci retracement levels can be traded in a number of different ways. Some traders set pending orders at the key retracement level and usually place their stop loss just below the 61.8% retracement in case it’s an uptrend. On the contrary, the advanced professional always wait for the price action confirmation signal to place their trade at the Fibonacci retracement level. By using the price action confirmation signal you can significantly improve your winning edge in Fibonacci trading strategy.
Let’s see a trade setup based on Fibonacci trading strategy:
Figure: Price respecting 38.2% Fibonacci retracement level
In the above figure, the bullish retracement level has been drawn by using the swing (low and high). Once the retracement level is drawn, the professional traders cautiously wait for the minor pull back of the price towards the important Fibonacci retracement level. Once the price hits 38.2% Fibonacci retracement level, the expert traders then cautiously wait for the bullish price action confirmation signal. In the above figure, we have bullish pin bar rejection at the 38.2 % retracement, which triggers the long entry.
Placing stops and take profit level
Placing the stops is a little bit tricky in the Fibonacci trading strategy. If you use price action confirmation signal to trade the market, you can use the candlestick pattern to set a tight stop loss and ride the trend. But some traders often set their stop loss just below the 61.8% Fibonacci retracement level.
In the case of setting the take profit level, most of the traders use the key support and resistance levels to find their potential take profit zone. But when you place your take profit level, make sure that you are aiming for at least 1:3 risk reward trades. Most of the time the expert traders even aim for 1:5 risk reward trade while using this trading system.
The Fibonacci trading strategy is very profitable and it tends to generate the extreme level of profit when used with price action confirmation signal. But as a professional trader, you must know that there is no system in the world that will give you 100 percent winning trade all the time. So if your trade hit the potential stop loss, don’t try to recover your loss immediately. Most of the time the professional traders consider it as a trade change signal when the price breaks the 61.8% Fibonacci retracement levels. So make sure that you follow proper risk management factors in every single trade when you use this system in your trading career. Last but not least, never trade with the money you can’t afford to lose.