What Are Fibonacci Levels & How To Trade With Them

Fibonacci Levels Explained

The Fibonacci retracement tool has become a relatively popular technical tool among traders, primarily due to the clarity that it can bring when attempting to identify corrective and trend movements in the Forex market. The majority of sufficiently strong trend movements in the forex market are developed in stages. The first market impulse is formed, which can then have a relatively small corrective action, before a continuation of the primary trend. The Fibonacci levels can be an excellent tool for identify key areas in all market conditions.

What are Fibonacci levels?

Fibonacci, also known as Leonardo Bonacci, Leonardo of Pisa, or Leonardo Bigollo Pisano, was an Italian mathematician from the Republic of Pisa, considered to be “the most talented Western mathematician of the Middle Ages”.

The Fibonacci sequence is a set of numbers that starts with a one or a zero, followed by a one, and proceeds based on the rule that each number (called a Fibonacci number) is equal to the sum of the preceding two numbers. If the Fibonacci sequence is denoted F (n), where n is the first term in the sequence, the following equation obtains for n = 0, where the first two terms are defined as 0 and 1 by convention:

F (0) = 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 …

In some texts, it is customary to use n = 1. In that case, the first two terms are defined as 1 and 1 by default, and therefore:

F (1) = 1, 1, 2, 3, 5, 8, 13, 21, 34 …

Fibonacci numbers are of interest to biologists and physicists because they are frequently observed in various natural objects and phenomena. The branching patterns in trees and leaves, for example, and the distribution of seeds in a raspberry are based on Fibonacci numbers. The same principles apply when using Fibonacci levels in forex trading.

Fibonacci levels
Fibonacci levels

The forex Fibonacci strategy can be quite subjective, but due to the fact that so many traders use them, they can also have a self-fulfilling prophecy. The key Fibonacci retracement levels to keep an eye on are: 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. The levels that seem to hold the most weight are the 38.2%, 50.0%, and 61.8% levels, which are normally set as the default settings of most forex trading platforms.

If you apply these ratios in any direction after the trend, then pretty soon you will be able to anticipate a possible continuation of the trend, or its end. The Fibonacci levels can become even more powerful when combined with other indicators and tools. For example, when working with Fibonacci levels, it can be useful to use moving averages to confirm trend direction along with oscillators such as Stochastics, RSI and CCI to also help identify market lows and highs.

You can use Fibonacci levels on any currency pair and chart time frame. I tend to find them most beneficial on the higher chart time frames as they are often watched by some of the big players and have more data contained within them. It also makes the Fibonacci levels easier for me to draw and helps filter out some of the noise from the lower time frames.

How to use Fibonacci levels?

The Fibonacci levels can be used to find areas of support and resistance. Around these levels, we can look for price to either reverse or breakout. Therefore, the Fibonacci levels can be used for entering/exiting trades and also for placing stop loss and take profits. The key Fibonacci levels mentioned above often tend to have the most significance.

Fibonacci levels support & resistance
Fibonacci levels support & resistance

The forex Fibonacci strategy is suitable to trade trending and counter-trend movements. I would always look for the price levels that were significant in the past and have previously been tested. This gives me more confidence in the importance of those levels and I would exepct them to either cause a price reversal or breakout.

Fibonacci forex Strategy is a tool such as “continuation of a gap.” With its help, it is possible to predict the reversal in the market and the end of the trend movement. Another method by which the Fibonacci strategy works is called the Night Grid. Before you start building a night grid, you need to select an active trading tool. To do this, pull the Fibonacci levels from the minimum (maximum) of the last trading hour of the session to the minimum (maximum) of the first trading hour of the next day. Use the resulting levels as resistance or support.

The forex Fibonacci strategy has another method that traders are actively working with. It is called “Second Low / High”. Quite often, it is difficult to figure out exactly how you will draw the grid on the price chart. To do this, find a small “double top / double bottom” within the cluster where your current trend began. After all the actions, apply one end of the grid to the second minimum or maximum and build levels from it already. The method will allow you to more likely determine the levels where breakdown or reversal will occur. Having studied and understood how this method works, you can make the Fibonacci strategy work exclusively for you.

Fibonacci retracements
Fibonacci retracements

Fibonacci trading strategy

You can either trade reversal pullbacks or breakouts using the Fibonacci levels.

Fibonacci pullback setup

Draw the Fibonacci levels from low to high in an uptrend or high to low in a downtrend. Now wait for the price to test 50% retracement level and enter for a potential pullback to the 0.0 level. Take a look at the chart below:

Fibonacci levels pullback setup
Fibonacci levels pullback setup

Fibonacci trend breakout

You can also trade in the direction of the trend. For this, you can wait for the breakout of 50% level. Once the price breaks the level, you can enter the trade while the stop-loss can be placed slightly below 38.2% level. The profit target can be placed at 100% level.

Fibonacci levels breakout
Fibonacci levels breakout

Fibonacci levels conclusion

It is important to remember that trading by Fibonacci levels is, to a greater extent, based on probabilities. Fibonacci indicators can be found in most trading platforms including the popular MetaTrader platforms. I would draw the Fibonacci levels from the the high and lows of the chart and use the levels as price points where I would expect some significant action.

The methods of implementing Fibonacci levels 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 levels, 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!