This particular strategy for Forex trading is one of the most frequently used amongst traders new and experienced. It can be used across most trading platforms and especially on the popular MT4 system.
It focuses on the ‘trend’ and ‘pullbacks’ within that trend. The timescale is not limited to a particular period however it must be long enough in order for a trend to be recognised. Like with any trending market or currency pair, there are always pullbacks within that trend and this is what the Fibonacci indicator is trying to identify. However, it is important to note that what has been identified is a pullback offering an opportunity to buy or sell and not a reversal in the trend and therefore should be avoided.
If we take a look at the chart above, we can see a fairly short trend that we will use as our example. We can clearly see that the trend is made up of three parts, two up and one down. In terms of the overall direction we can see that the trend is up and therefore the middle section that goes down is what we call the pullback. The difficulty comes when trying to identify if the pullback is in actual fact a correction. This is where Fibonacci plays its part.
Fortunately for those of us who don’t like complex calculations the math is done for us by the platform. All we need to focus on are 3 lines that appear on our graph which is shown below and make a decision based on these. Many will say that there are lots of different numbers which play an important part in Fibonacci trading but I would say there are three main ones that we need to focus on. These are 0.382, 0.5 and 0.618. Others that some might use would be 0.764 and 0.236.
The three lines shown on the chart above are the Fibonacci ratios that we want to use for our strategy. Depending on how far the price has come back on the pullback will determine whether the price will pull back up again or whether there is a change of trend. As long as the price remains above the 61.8% level then we can assume that the trend will resume and it is offering us a chance to buy. If the price crosses this level, then we must assume that it is the start of a bearish or bullish trend depending on the direction of your trade and therefore it is time to close the trade.
So in conclusion the Fibonacci Indictor strategy is a simplistic way of identifying opportunities within trends without the complication of complex math.