The Auto Fibonacci Retracement Indicator is one of the handy tools for technical analysis used by traders. Retracements are price zones where a market move is expected to pause or reverse a trend, and they are named after medieval mathematician Leonardo Fibonacci’s contributions to number theory. Many traders use Fibonacci numbers to determine support and resistance levels.
What is the Auto Fibonacci Retracement Indicator?
The Auto Fibonacci Retracement tool essentially employs a Fibonacci sequence, which comprises 0,1,1,2,3,5,8, 13, and so forth. The Fibonacci ratios are obtained by dividing the Fibonacci numbers by the neighboring numbers. These ratios are plotted on the price chart by the Fibonacci retracement tool. Before you can plot the indicator, you must first determine the highs and lows of the chart. Identifying the highs and then plotting the chart can be a difficult undertaking. Needless to say, you are prone to making errors, especially if you are unfamiliar with the indicator. The indicator, as the name says, automatically plots the indication on the chart. It determines the high and low points on the chart for you. This implies you don’t have to explicitly set the two points.
Auto Fibonacci Retracement Strategy
The Auto Fibonacci plot depicts retracement levels ranging from 0% to 100%. When the market is down, the zero point is at the top and the 100 point is at the bottom, and vice versa. Essentially, the market tends to retrace up to the various Fibonacci retracement levels after achieving a new high.
The price frequently rises to the 50% Fibonacci level. However, 61.8% is preferred by most traders since it provides a significant pullback. The 78.6% level is also a strong reversal opportunity, albeit one that is often neglected.
In addition to trading pullbacks, Fibonacci levels provide excellent take-profit levels for riding the trend. For example, if an uptrend is retracing, you could enter a short position with a stop-loss at 68.1%.
Buy Signal
The following could be your checklist for a buy trade:
- When the current trend of asset being traded is bullish.
- When the current price retraces to one of the Fibonacci retracement levels given by the indicator.
Once these two events occur, you could do the following:
- Open a buy position at that Fibonacci retracement level where price pulled back to.
- Set your stop loss just below the nearest swing low.
- Set your take profit at the nearest resistance zone.
- For good risk management and long-term profitability, only pick the trade if your risk to reward ratio is 1:2 or more.
Sell Signal
The following could be your checklist for a sell trade:
- When the current trend of asset being traded is bearish.
- When the current price retraces to one of the Fibonacci retracement levels given by the indicator.
Once these two events occur, you could do the following:
- Open a sell position at that Fibonacci retracement level where price pulled back to.
- Set your stop loss just above the nearest swing high.
- Set your take profit at the nearest support zone.
- For good risk management and long-term profitability, only pick the trade if your risk to reward ratio is 1:2 or more.
Auto Fibonacci Retracement Pros & Cons
Pros
- This indicator can be used by the trader to catch some good moves particularly in a trending market.
- The retracement levels of the indicator provide potential support and resistance levels.
Cons
- The indicator may not meet the trader’s expectations in a consolidating market.
- This indicator may require some extra knowledge of price action in order to use it effectively, hence novice traders may have a little challenge with it.
Conclusion
The Auto Fibonacci Retracement Indicator makes it simple for technical traders to plot Fibonacci levels. The indicator does not, by itself, give an entry and exit signal. The Fibonacci levels, on the other hand, provide great entry and exit points. As a result, it is best to utilize the indicator in conjunction with other methods to determine confluence.
Fibonacci retracement levels frequently and uncannily predict reversal points. However, they are more difficult to trade than they appear in retrospect. Many traders have found success in employing Fibonacci ratios and retracements to place trades within long-term market patterns.
When combined with additional indicators or technical indications, Fibonacci retracement can become even more potent.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
