Fibonacci Retracement: What Is It And How To Use It

Fibonacci Retracement is a powerful tool used in forex trading to identify potential price reversals. Based on the Fibonacci sequence, it involves drawing levels at key points where the price might reverse. Here’s are some common benefits of the Fibonacci Retracement.

Identify Trends: Looking for a series of higher highs and higher lows in an uptrend, or lower highs and lower lows in a downtrend.

Draw Fibonacci Levels: Using the highest high and lowest low to draw Fibonacci levels (0%, 23.6%, 38.2%, 50%, 61.8%, etc.).

Analyze Price Action: Observing how the price reacts to these levels. If the price bounces off a level, the trend may continue.

Set Stop-Loss and Take-Profit Levels: Using the Fibonacci levels to set these critical points, ensuring better risk management.

You can also combine Fibonacci Retracement with other indicators like moving averages or RSI to develop your strategy. It can also help to identify potential reversal points. For example, when price breaks below a Fibonacci level, this is an indication that the trend may reverse.

Example Trading Strategy:

• Identify an uptrend for an instrument, for example EUR/USD.
• Draw Fibonacci levels from the lowest low to the highest high.
• Set stop-loss and take-profit levels at specific Fibonacci levels.
• Enter long when the price breaks above the 50% level.
• Monitor and adjust your trade as needed.

Following these steps, traders can use Fibonacci Retracement to identify potential reversal points and set stop-loss and take-profit levels in their forex trading strategy.

By combining this indicator with other technical analysis tools, traders can gain valuable insights into market trends and make better-informed trading decisions.

Source: TradingView. Numbers are adjusted individually; you can always adjust to what works better to you.