The Fibonacci strategy should be an integral part of every Forex trader toolbox.
This strategy is based on a number sequence (1,1,2,3,5,8,13 etc) invented in the 13th century by Leonardo of Pisa, also known as Fibonacci. This number sequence creates what is commonly known as the Golden Mean. The Golden Mean is calculated by is using the ratio of every number to the next number which is 0.618. When using every alternate number the resulting ratio is 0.382. The Fibonacci strategy uses these ratios to calculate Retracements and what is commonly known as the Fibonacci Profit targets.
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Now, the question is, how do these retracements and profit targets are applied to a chart? What you want is for these numbers to be plotted between the Swing High and Swing Low. A Swing High is the highest point on your chart for the time-frame you chose/setup. Conversely, the lowest point on your chart for the time-frame you are using is called a Swing Low. Once you know where these points are, you can plot the Fibonacci traces on them. By plotting it this way, you will get the most likely support and resistance levels of a trend. These “plot” results on your chart are called a ‘trace’.
These plot results create the Fibonacci Retracements and Fibonacci Profit Targets. In essence, Fibonacci Profit Targets are mini resistance levels and the Fibonacci Retracements are mini support levels.
To chart the Fibonacci Retracements just choose a Swing High and a Swing Low. your charting software will do the rest showing you the Fibonacci levels or mini support levels if you will. If you are a new trader, the recommended directional move is 25-30 pips or a little more and, in an uptrend, your buy signal is in the 50% or the 61.8% level.
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The Fibonacci Profit Targets are, by default, an extension of the Fibonacci Retracements. The profit targets are most of the time above the retracement levels. Treat these levels as mini resistance levels and get out of the trade when these levels hit. If you are using a 15-minute chart, the trend will stop progressing at the 1.362 level.
Tip: The 1.362 level is not accurate if the trend is really strong. Use oscillators to determine the strength of the trend.
When you combine the Fibonacci strategy with oscillators and other indicators, you will be profitable 50-60% of the time. As a rule of thumb, risk 10-15 pips on a Fibonacci trade, and take 40-50 pips as your profit. This simple strategy can generate great profits for you.
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