This Article is About
trading strategy
Understanding Fibonacci Retracement Tool And How To Integrate It Into Your Forex Trading Strategy
Join 1000's of Authors at StreetArticles Today!

Understanding Fibonacci Retracement Tool And How To Integrate It Into Your Forex Trading Strategy

The Fib Retracement Tool is one of my favourite Forex Trading Tools. You might already have free access to it within your trading platform if you’re using MT4, almost all forex trading platforms and charting applications I have come across have at least the Fibonacci Retracement and Extension Tool some platforms even offer more tools like the Fibonacci Arc, Fibonacci Spiral and so on.

Before we Jump right into the meat of how you can use this Fib Retracement Tool to improve your trading skills and thus adding it to your trading tool chest I must warn you though that through your journey to becoming a Pro Forex Trader you’re likely to come across a lot of misinformation and hype on the information highway, you must be very selective when it comes to choosing tools you plan to trade with.

Don’t go dumping your trading strategies or system for the Latest and Greatest forex trading robot, always remember that less is definitely more when it comes to forex trading tools.

Most Forex traders tend to use the fib retracement tool the wrong way, before using the fib tool to confirm your trading decisions you must understand exactly what its does and have some tool that would help you tell what market environment you’re in (Mark Up, Mark Down, Inside the Range, Accumulation or Transition Market Cycle).

Knowing these helps you in more ways than one but just to list a few, you will be able to tell which of the trades you place are trend or counter trend trades with 100% certainty thus helping you make better and more calculated risk management adjustments such as placing realistic profit and stop target 100% determined by the market when you get a little creative and add the psychological levels analysis to the mix.

What the Fib Tool Does

Charts move in cycles am sure you must have heard that before. Just have a look at a simple equity chart and you will see that there’s no growth without contraction. Even if it’s been established that the Euro is in an uptrend there’ll still be dips along the move up this could be profit taking driven or it might just be caused by the many different intraday News Events.

Traders run off trying to buy low and sell high which is actually good in a way, but how do you tell if the price of a currency is low enough and a good buy or vice versa. Yes, the MACD Divergence forex trading strategy might help you with that but how many times have you seen all the indicators on your chart point to one thing only for the market to do the opposite resulting in traumatic losses?

To better illustrate to you what the fib tool does let’s use an example of a long trade in a bullish trading environment in other words a Mark Up market cycle. Say the EURUSD has just formed an inverted head and shoulders chart pattern along with a positive MACD Divergence followed by an upward breach of the most significant downward sloping supply trendline by a strong bullish change of direction candle after just forming a long wicked doji candle signaling a reversal aiming to break through the 1.3150 immediate psychological resistance level with current prices at 1.3132.

The confluence of events all pointing to the fact that the selling spree might just be over with the prominent reversal indicated in more significant detail by the long wicked doji candlestick otherwise known as the gravestone doji candle representing the aggressive profit taking by savvy traders and the flood of buy orders as represented on the chart by the bullish change of direction candle signaling the domination of buyers within current market conditions.

I’ll place a buy stop order at 1.3147 with a stop loss at 1.3117 and a profit target at 1.3197 and wait for the market to come to me filling my order and proving my analysis was actually worth something, these price levels are not just randomly picked; psychological levels play a vital role in the movement of prices and so I employ them into my trading methodology.

Assuming that all went well and this trade reached my specified profit target I’ll pick out my fib retracement tool to forecast future areas of possible support to place another buy stop order and wait for trader consensus to prove me right again when price fills my order again, jumping right into another Buy trade in the Mark Up market cycle just confirmed by the successful fulfillment of my previous winning long position.

I use the Fibonacci Retracement Tool to forecast future levels or support and resistance as the case may warrant in an uptrend or downtrend (i.e. a Mark Up or Mark Down Market Cycle). The reasoning behind this is that if you have a 100 pip swing move to the up side, unless the prevailing condition that lead traders to believe that the value of the base currency appreciating in value have changed, the momentum behind buy trades could only increase.

So when I draw a fib retracement for our example 100 pip move on the Euro chart from 1.3100 – 1.3200 as travelled by the pair, price levels representing the 23.6%, 38.2%, 50%, 71.8% and 100% of the move from 1.3100 – 1.3200 will be drawn automatically saving me the stress of having to calculate and draw this important high probability buy trade Re – entry levels manually on my chart before waiting to see which of these levels will provide a strong base of support (i.e. where sellers will be completely unable to push prices lower or where previous buyers will be completing their profit taking by closing their previous buy orders that are now in profit through executing an opposite sell order).

Just think about it for a minute, when there are no more sellers in the market who’ll rule?

The answer, either the market transitions into equilibrium in prices which usually doesn’t last long, or the buyers dominate and cause a rise in demand and thus bidding prices higher. To Trade successfully your trades must agree with that of the current market movers which happens to be the buyers in our example.

If you took some time to read the preceding paragraphs well enough you’ll notice that I look at quite a couple of factors before I consider opening a trading position as opposed to just waiting for some lagging technical indicator to call the shots for me blowing my trading capital which is what the majority of the loosing forex traders do.

Before clicking on the buy or sell button in your forex trading platform you have to have already worked out your trade like a game of chess. You should know at what price you’re going to enter the market and at what price you’d be getting out, what percentage of your trading capital you’re staking on each and every trade you intend to take on and at what price levels you’re going to be taking some profits off the table enjoying a reduced loss trade, break even trade, or a trade fully reaching your profit target. This would help make trading stress free.

The chart patterns you learn about being a part of your foundation of forex trading basics are gems you’ll only grow to trust and respect as you practice and improve your trading skills. Many Newbie Traders tend to drop these thinking they are the kids stuff for the more complicated trading systems with the thoughts that it’ll make them more money.

A profitable trading system doesn’t need to be complicated, in fact I have only come to find out that through the hard way through the years that the simpler the forex trading strategy the more effective it proves to be eventually.

Try out using the fib retracement tool on a demo account with your currency trading broker of choice until you get the hang of it before moving on to adding it to your forex trading arsenal and using it for live trading on a micro account.

Hope you found this article helpful, I’d love to hear your comments and answer your questions, don’t forget to share this with your friends, cheers…

Street Talk

No comments present
You May Also Like
Mirror Trading Strategy - Beginners Guide to Mirror Trading
The specific Mirror Trading platform may be used by both checklist Forex clients together along with institutional clients. While using Mirror Trading Strategy, traders and traders can check out, evaluate and analyze trading signals signals from other experienced traders as well as promtply execute the signals inside their balances. The…
By: Jeanene in  Investing  >  Day Trading   Dec 16, 2011  
  Likes: 0

Elss : Encompassing Investments With Tax Saving
The financial year 2015-16 has ended and with that, the tax paying deadline is also over. It is often observed that the clients pursue the tax saving plans by the end of the year, i.e., in February or March. It may have helped you till now, but it is a…
By: Dishika Baheti in  Investing  >  Day Trading   May 18, 2016  
  Likes: 0

How to Choose A Broker for Day Trading
Day trading is the practice of holding positions in a financial market for no longer than a single day, and often for much shorter periods of time. Day traders always exit any trade before the end of the trading day (often referred to as the 'regular cash session'), and aim…
By: Alexander Pearson in  Investing  >  Day Trading   Apr 27, 2016  
  Likes: 0

Fundamentals Of A Company Check - What Would Be the Services Employed
Business planet is cool as well as risky. The deeper you enter, the a lot more threat you get into. Nevertheless a systematic approach generally assists to collect the puzzle and stroll straight. Investing into a company could be helpful should you go through a meticulous company check. All strings…
By: daniel huang in  Investing  >  Day Trading   Apr 26, 2016  
  Likes: 0

How Administration Outsourcing Benefits Private Wquity And Venture Capital
In the high-frequency world of alternative securities, private equity and venture capital investments stand out for bringing in substantial returns from equity appreciation and capital gains. Private equity firms align with accredited investors, like wealthy individuals and institutions such as foundations, university endowments, pensions, insurance companies, and other multi-manager funds,…
By: Cheryl Muncher in  Investing  >  Day Trading   Mar 15, 2016  
  Likes: 0

Tips for Buying Refurbished Robots
Is a refurbished robot right for my business? That is the first question that comes to mind when you consider buying a refurbished robot. They are repaired, rebuilt, and cleaned in order to reenter the robot market. If bought from a quality robot store, they offer cost benefits as well…
By: alexbarker in  Investing  >  Day Trading   Feb 19, 2016  
  Likes: 0

Out Of Currently Being Goods Involving Must to Help Professions to 800 DIY Currently Currently Being
Many people maintain the money pertaining to items it's possible not really pertaining to paying for models concerning the Professions powerleveling railings. The most famous porch models typically include wood. Lumber porches plus lumber railings generally go with equally modern day plus Victorian or even various other form real estate.…
By: appgamenews in  Investing  >  Day Trading   Jan 21, 2016  
  Likes: 0

What is the Highest Standard Of Corn Peeling Machine?
Corn peeling machine develops towards high-performance. And we have high quality automatic corn peeling machine now. Corn peeling rate can reach 98% above and soybean and mung bean peeling rate can reach 95% above, which reaches the highest standard of this industry. When it refers to find out a high…
By: paomo in  Investing  >  Day Trading   Jan 08, 2015  
  Likes: 0

How To Choose The Right Bridesmaids Dress
Like planning your wedding, every stage of the selection of bridesmaid Long Champagne Bridesmaid Dress is once in a lifetime event. Exciting, right? But because it is a one-time, I know to make a decision may be a little scary. After all, you can not rely on past experience to…
By: vickysunny in  Investing  >  Day Trading   Oct 27, 2015  
  Likes: 0

Knowing The Ins And Out Of Forex Helps
Opportunities abound for personal traders in the Forex marketplace. You should take time to research the forex market carefully, as it can net you significant earnings. During the learning process, new traders can greatly benefit from guidance provided by seasoned traders. Read this article for advice on how to get…
By: mick leach in  Investing  >  Day Trading   Feb 07, 2012  
  Likes: 0

So What is Forex?
If you have ever traveled to a foreign country, then you must have found it rather necessary to find a currency exchange booth right at the airport, and exchange the money present in your wallet that is if you are a man or a purse if you are a women,…
By: Graham O. Osano in  Investing  >  Day Trading   May 12, 2013  
  Likes: 1

Automatic Forex Trading Systems - Do Metatrader 4 Expert Advisors Really Work?
If you've been on the Forex trading scene for any given amount of time, you're likely to have come across one of the many automatic Forex trading systems available on the market. The majority of the best Forex trading systems are created as Metatrader 4 expert advisors, and there are…
By: Thad B. in  Investing  >  Day Trading   Feb 21, 2011  
  Likes: 0

Things to Avoid Before Entering the Forex Market
A vast majority of forex traders never achieve success as a forex trader, yet everyone wants to get into the forex business. They think that they be able to beat the odds and become one of the few successful forex trader. However, most traders enter forex market and make the…
By: prabhu1 in  Investing  >  Day Trading   Dec 30, 2013  
  Likes: 0

Truths That Cannot Be Denied About Forex
There is a lot of interest in forex markets, but a lot of people tend to be hesitant. Perhaps it seems difficult for a lot of people. It's always wise to be careful with your money. You want to educate yourself on Forex before you start investing. Pay attention to…
By: mick leach in  Investing  >  Day Trading   Feb 08, 2012  
  Likes: 0

How To Succeed With Forex Trading Today!
Anyone can trade on the foreign exchange market. Read on to discover the basics of forex, and some ways you can make money by trading.Don't expect to create your own unique strategy to wealth in forex. Forex trading is a complicated system that has experts that study it all year…
By: mick leach in  Investing  >  Day Trading   Feb 06, 2012  
  Likes: 0

Article Views: 2853    Report this Article