What Are Fibonacci Arcs & How To Trade With Them

Fibonacci Arcs Explained

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.

Fibonacci Arcs on chart
Fibonacci Arcs on chart

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”:

Applying Fibonacci Arcs on chart
Applying Fibonacci Arcs on chart

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:

Fibonacci Arcs in uptrend
Fibonacci Arcs in uptrend

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.

  1. So, if on an uptrend, the price goes down and fights off one of the arcs, it’s a signal to buy;
  2. On a downtrend, the price rolls up, and there is a rebound from the arc, it’s a signal to sell.
Using Fibonacci Arcs to buy
Using Fibonacci Arcs to buy

Fibonacci Arcs trading strategy

Our basic Fibonacci Arcs strategy is based on pullback from Fibonacci Arcs 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 buy setup
Fibonacci Arcs buy setup

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 sell setup
Fibonacci Arcs sell setup

Fibonacci Arcs conclusion

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.

I would prefer to use the majority of technical indicators such as Fibonacci Arcs on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

Fibonacci Arcs is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing Fibonacci Arcs into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with Fibonacci Arcs, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!