The most Useful Strategies for Trading Fibonacci
Here the most practical and at the same time the simplest strategies with which you can use Fibonacci levels are explained. These few lines will take about 8 minutes of your time, but will permanently solve the problem of using Fibonacci for your trades.
We explain the strategy in a few simple steps:
Draw the best-fitted Fibo retracement on your chart or let the Smart Fibo Drawer do it for you. Keep in mind that Fibonacci can be drawn on any timeframes and analyze any pairs. Still, first, you need to know which timeframe and which method suits you better based on your strategy. (Let's take EURGBP, 1H)
Based on your chosen market and timeframe, decide whether you want to trade "tests" or "breakouts".
Here, a test is when the price hits a resistance or support line and returns. In a test, traders wait for the resistance or support areas to be touched, and then they execute their trades as soon as the price returns from these areas.
However, a breakout is when the price approaches, hits, and then passes the resistance or support areas. In this case, traders assume that the price will move toward the other area after the previous areas are broken (or they're predicted to be broken). One of the uses of Fibonacci is to obtain these next areas.
Note that basically, deciding whether to trade tests or breakouts is not subjective. You need to choose one of these based on the current conditions of the market in your chosen pairs and timeframe.
For instance, if the market is -so-called- trend (sharp movements are being seen in either direction), this is less likely for the price to get stuck in a range area. Therefore, the breakout strategy would be a better choice and vice versa.
Alright, so far, so good!
Let's see how we can use the drawn Fibo levels in either strategy.
Figure 1 demonstrates a condition where choosing the test method makes more sense. If you ask why, I would say just because the market has been range for a while!
The trading method here is straightforward: by hitting the blue or red area, we wait for the trend to return to the opposite direction. When the price returns, we enter the trade immediately.
- The take profit limit is set close to the 50 Fibonacci level.
- The stop-loss limit is placed above the resistance (or support) area.
Now, have another look at figure 1, and you'll understand why the "50" level is essential! You can see that nearly all touches on 0 or 100 levels have ended up hitting "50" in a way!
However, if the movement is rather sharp, you may place your profit limit at the other support (or resistance) area. For example, if you entered the trade at "0" level, you may take your profit at "100" instead of "50".
That's it. You just learned how to trade ranges without knowing plenty of formulas and technics!
Well, now it's time to see how we trade stronger trends.
This is also very simple.
You just have to do one extra thing. That is, draw an area on your Fibonacci drawing. Let's name the area between 38.2 and 61.8 the Retracement zone. Now draw a zone for it as shown in Figure 2 so that you can better distinguish it.
From here on, things get easy again:
- Find the main movement, a strong movement from level 0 to 100 (or vice versa).
- Suppose your trend follows the Fibonacci pattern. In that case, you should see a retracement in the opposite direction of the trend, right after the main move! The depth (projection) of this retracement shall not be more than the zone you just drew!
Did you get the point? The whole issue is the depth (projection) of retracement!
- Give the trade away if your retracement was more than the retracement zone! That's probably not a natural Fibonacci pattern.
Don't worry; look at other charts and other timeframes. The markets are full of opportunities!
- If the retracement was within the retracement zone, wait for the price to leave the zone in the direction of the main trend and enter the trade right away.
- Set the profit limit right in the middle of 100 and 161.8.
- Place your stop-loss just after the retracement zone!
The crucial point is that the shallower the retracement (The shorter the leg of the retracement), the stronger the main trend. So if you want to trade more confidently, trade trends that have short retracements!
Done! Read this page and simply trade with Fibo! You know that you are not going to close 100% of your trades with a profit. Don't you?! Anyway, this method gives you a regular and, at the same time, simple strategy with which you can get out of most of your trades with profit.
By the way, drawing Fibonacci is much more critical than analyzing it. If you have trouble drawing a Fibonacci, be sure to head over to this page!