The Fibonacci tools are widely used by all types of traders in the forex markets but are they any good? And what levels are the best?
In this video, we take a look at how to use the tool more effectively in your trading.
Watch the video to learn more…
Today we’ll be going over Fibonacci levels, and which ones you should be looking out for.
I’m going to tell you from my experience how you can use them in your own trading and go from there.
Where to find the Fibonacci tool
First thing to discuss is uploading the Fibonacci tools. So, if you go up to the top right toolbar, you should see Fibonacci.
If not, you can go to Insert > Objects > Fibonacci retracement tool. Once you’ve selected that, you can drag it onto your screen.
Fibonacci default settings and properties
The default settings that you get on Metatrader include numbers that you’re probably familiar with, and some numbers that you’re probably not.
You’ll get multiple numbers. The most popular numbers are probably the 61.8%, the 50% and the 38.2%
We also have the 161.8%, which is considered the golden Fib ratio. Many people use it for targets in the market. But, it’s not necessarily needed. The reason is because the price is king.
So, you only want to use Fibonacci if you’re using it for strategy or confluence.
Measuring Trend/Drawing fibs
When opening the Fibonacci tool, you will see different levels. Some you may be familiar with already (e.g.50.0 or 61.8 levels), and others you won’t be. For this example, we have deleted any number above 100.0 and will leave the rest of the levels.
You’re essentially measuring the retracement of a trend. Typically, if we were to draw some lines on the chart at an uptrend environment. You can look at where to draw your Fib from.
Before drawing the tool onto the candles, we need to understand when to use the Fib tool. This tool is generally used in trend trading environments and is used to measure the retracements. In theory, the shorter the retracement, the stronger the trend. However, the Fib tool is best used when in confluence with structure. As you can see in the chart, if the market were in an uptrend, we would draw the fib from the swing high to the swing low and see if the fib levels line up with any structure levels.
This works extremely well when adding multiple timeframe analysis – by applying a fib on a higher timeframe and using the levels combined with structure to enter on a lower timeframe.
The best way to use the Fib tool is using it in conjunction with structure or on supply and demand zones. This is because the tool is more of a confluence tool rather than using it on its own because it doesn’t really work on its own unless you are trying to trade key supply and demand or with volume.
Fibonacci tool in trending environments
I’m going to take a few options on GBP/USD and show you how you can use Fibs in uptrending and downtrending environments.
We have this huge uptrend forming on GBP/USD. We can see that the market is making higher highs and higher lows in some areas.
The GBP/USD weekly chart recently showed a strong uptrend, we can use this as an example to see what Fibonacci levels lined up with the previous structure levels and how the market reacted on a lower timeframe.
You’ll want to identify where the market will more likely continue the trend. We look at previous structure highs and lows,supply and demand zones, and volume levels. However, if we’re keeping it simple, the price has made a higher high.
We can go from the swing high down to the swing low and measure the potential retracement. You’ll want to include the wicks of the high and the low.
Essentially, you want to see if any Fibonacci levels line up with the previous structure. In this case, I would be focusing more on the 38.2 Fibs than any of the other ones because it relates to the previous structure.
Drawing our fib tool from the swing high to the swing low of the impulse move we can see that the 38.2 fibonacci level lined up with the previous structure highs showing a strong level of support.
38.2 would be the area I want to be long from, adding structure and Fib confluence together. You can see that the 50% and the 61.8% don’t relate to anything, so there’s no reason for me to look at those Fibs to go long from.
If you do this on a weekly timeframe and then you go into a four-hour timeframe, you can then identify what’s happening, and you can see what happens with the price.
We’re starting to see buyers and sellers, and a supply or demand zone being built. We don’t know which one it would be until the price breaks out.
You can watch those changes in cycle patterns or look for the trend to start going in favour of the supporting area.
Going down into the four-hour timeframe, we can see that this weekly zone with the Fib level acted as support. The chart shows that a consolidation is building, giving us an opportunity to look for a breakout for a long opportunity at the major support.
Once you get a boxed area, you could look for the breakout, and retest the zone.
The Fibonacci tool on trend line breaks
Alternatively, you could look for trend line breaks. So, if you notice that the price is coming back and you had a previous structure high lining up , you could look to see if the price breaks out and then trend back up to the 100% level on the Fib.
That’s when it works well—using it as a confluence to your higher timeframe trading.
The Fibonacci tool on a lower timeframe
If we were to grab a Fibonacci tool, we would go from a swing high area down to a swing low. We would identify the area where we’d want the price to come into that candlestick zone, which is between 38.2 and 23.6.
Suppose we focus on what the other ones are doing from the 50% up to 61.8. It doesn’t coincide with anything so we can’t use that for opportunities.
If you’re using the daily timeframe, you can go down to the hourly, and look at the huge demand coming in.
As the price is approaching the desired level, you want to look for opportunities to trade back to the upside.
Fibonacci tool, the quick way
One of my favourite things that you can do with your Fib is by looking at the 23.6 because this level is quite crucial to the markets as it’s almost the last level before the price usually makes 100% retracement.
If the price retraces 100%, you’d see the market reverse.
If we were to move this Fib tool and go from the swing highs, the market comes back down, bounces from the 23.6, but as soon as the market closes below it, that’s when we start to get the change in trend forming. The market is almost making lower lows and lower highs at that point, and we get that reversal in the trend.
So, that’s another quick way of how you can use that Fibonacci tool. If you are going to use your Fib tool in your trading, make sure you have other confluences with it.
The 23.6 trick is a useful tool to add into your trend trading. The way I use this level is as a last chance for support or resistance before a change of trend. If the price were to close below or above the 23.6 fib level. Depending on the trend direction, we will often see a reversal to that trend. In the example above, we can use the fib tool from the highs to the low. The price initially reacts to the 23.6 Fib tool and previous highs but then closes below it. This triggers a reversal in the uptrend.
Use that Fib in conjunction with higher timeframes, keys structure points, and add it as a confluence to your trading.
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