Fibonacci Arcs, unlike all the Fibo tools, not only displays horizontal correction levels but also take into account the time factor, which, in some cases, makes this tool more flexible and accurate relative to others. The tool, like the majority of other Fibonacci tools, are already built into the MT4 platform. If this is your first encounter, you can download the Meta Trader 4 terminal for free from a forex broker.
What is the Fibonacci Arcs?
Fibonacci Arcs include strong levels – 38.2, 50.0, 61.8%, and show the general picture of price movement along arched lines (ellipses). Correct determination of the values of these lines (support and resistance) allows you to determine goals, long-term correction, and price reversals.
For the practical application of this tool, a Fibonacci grid is installed in MT4. The chart is built on two points through which a reference line (straight line) is drawn, and a trend is determined. The second line will serve as the center of the ellipse. One of the radii of the ellipse should pass through the first point of the reference line. The second radius is empirical.
Three ellipses with centers at extreme points are constructed according to the described principle. In this case, the reference line will be divided by Fibonacci coefficients into segments. On the chart, the trader sees only part of the ellipse – arcs, which are indicators of future levels of support and resistance in theory.
How to use Fibonacci Arcs?
So, to apply the tool on chart, go to the “Insert” menu at the very top of the terminal and select “Fibonacci”. The platform will offer several Fibo tools, among which select “Arcs”:
Fibonacci Arcs are plotted for an uptrend and a downtrend at two points on the chart. So, on an uptrend after selecting an instrument, it is necessary to note the lowest point from which the trend began, as well as the high, from which the pullback started. Then, without releasing the mouse button, stretch the arcs from low to high.
If everything is done correctly, then you will get something like this:
To build Fibonacci arcs on a downtrend, you need to do the same thing as in the previous example, but from high to low.
But it may happen that after applying the tool to the chart, instead of arcs, you will see horizontal lines.
Such an error in tool scaling may appear if you are using a terminal that is five-digit quotes. By default, arcs are built on four-digit quotes.
If quotes have five decimal places, you need to zoom in 10 times. To do this, double-click the left mouse button on the dashed line of the tool to mark it, then right-click and enter its properties. Then we switch to the Parameters tab, and in the line “Scale” instead of 1, we prescribe 10 or 20 (it does not matter).
You might notice that the construction takes place in the form of rays that are not limited in time. Arcs, on the other hand, limit price movements; that is, if the price goes beyond the limits of constructing arcs, the probability of the end of correction is minimal, and the market may enter a wide flat or consolidation zone.
It has already become clear that arcs can be successfully applied in intraday strategies.
So, before us are three arcs with values 38.2, 50.0, 61.8.
As with other Fibonacci tools, each level has its strength, and the more deeply the price is adjusted, the more likely the trend will reverse or resume.
The principle of using Fibonacci arcs is quite simple, it consists of trading on the rebound from arcs.
- So, if on an uptrend, the price goes down and fights off one of the arcs, it’s a signal to buy;
- On a downtrend, the price rolls up, and there is a rebound from the arc, it’s a signal to sell.
Fibonacci Arcs trading strategy
The Fibonacci Arc is drawn directly on the chart. Similar to other Fibonacci tools the tool connects a swing high and swing low, which then creates series of arcs.
The Arcs occur at Fibonacci retracement levels: 23.6%, 38.2%, 50%, 61.8% and 76.4%. Although by default, usually only the 38.2%, 50% and 61.8% are shown. The levels are not horizontal though, as with Retracements and Extensions.
Our basic Fibonacci Arcs strategy is based on pullback from Fibonacci levels.
Fibonacci Arcs buy trading signal
- You can buy an asset if the price reaches 38.0, 50.0 or 61.8 level in an uptrend.
- Stop-loss can be placed slightly below the recent low.
- Take-profit can be the next Fibonacci Arc level on the upside or the immediate resistance level.
Fibonacci Arcs sell trading signal
- You can sell an asset if the price reaches 38.0, 50.0 or 61.8 level in a downtrend.
- Stop-loss can be placed slightly above the recent high.
- Take-profit can be the next Fibonacci Arc level on the downside or the immediate support level.
Fibonacci Arcs conclusion
Fibonacci Arcs are half circles that extend out from a trend line drawn between two extreme points. Four arcs are then drawn, measured from the second extreme point, so they intersect the trend line at the Fibonacci levels of 23.6%, 38.2%, 50.0%, and 61.8%.
It is worth noting that, despite the first frightening impression of Fibonacci Arcs, in practice, they are very simple to use, and the construction itself takes only a few seconds. It is worthwhile to understand that Fibonacci Arcs are useful as an additional filter for trading strategies, but I would not base my trading on Fibonacci arcs alone.
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