Fibonacci is everywhere. It is in nature, it is all throughout our world. The Fibonacci sequence is a series of number in which the previous 2 are added to make the next number in the sequence. For example, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 are the first 10 numbers of this sequence.
Fibonacci also provides ratios and these ratios are used in forex in the form of a Fibonacci retracement. When we are in a trending market we know that price is either making lower lows and lower highs, or higher highs and higher lows. This means the retracement move is slightly shorter than the trending impulsive move and so we can use a Fibonacci retracement to predict where price may retrace to.
Let’s take a look at a couple of examples.
Here we have a chart of EURNZD on the 4-hour timeframe. As we can see looking at the chart, price made an impulsive move down creating a new lower low. We then apply our Fibonacci retracement tool on our trading platform with our 1 level at the start of this impulsive move, and our 0 level at the end of this move and we await a retracement.
As you can see price came all the way back up to tap our 61.8 retracement level before another impulsive move reaching our target level of -23.6. The 61.8 retracement level is a very powerful level as this is the same as the golden ratio of 1:1.618 and is therefore the retracement equivalent. Now let’s look at a bullish example.
On this chart we have the USD/CAD pair on the 1-hour timeframe. We can clearly see we are making higher highs and higher lows. After making a new high we expect a retracement and we had a perfect touch of the 50% retracement level before pushing to reach all 3 of our target levels! Again, we positioned our 1 level at the start of the impulsive move and our 0 level at the end.
The 50% level is another powerful level of Fibonacci as this represents the equilibrium or the halfway point of the initial impulsive move and is often well respected within retracements!
Here are our top 3 tips for using Fibonacci
Tip 1: Always make sure you are in a trending market to use Fibonacci.
Tip 2: Remember to position your 1 and 0 levels at the start and end of the impulsive move respectively in direction of the current trend.
Tip 3: Look for reversals around the 50% and 61.8% levels for your best entry into the market.