Fibonacci Forex Trading Strategy for An Uptrend

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Fibonacci Forex Trading Strategy for An Uptrend



One of the most popular confirmation tools that can help identify whether the price of a market may turn or not is price action analysis. This is the study of candlestick or bar formations on the chart and there are a variety of price action trading patterns traders can choose from.

If Fibonacci retracement levels give us the area to buy or sell, then price action trading patterns can help us time when to buy or sell.



The hammer pattern, as shown here, is a bullish signal which signifies the failure of sellers to close the market at a new low and buyers surging back into the market, to close near the high.



The shooting star pattern, as shown here, is the opposite of the hammer pattern. It's a bearish signal which signifies the failure of buyers to close the market at a new high, and sellers surging back into the market, to close near the low.



Let's start with a simple set of rules for when the market is in an uptrend:



1. Identify large cycle up (X to A) and draw on Fibonacci retracement levels from the bottom of X to the top of A, using the Fibonacci indicator in the MetaTrader trading platform provided by your broker.



2. Identify bullish price action trading pattern, such as the 'hammer' pattern at one of the Fibonacci retracement levels.

Both these rules are shown in this example price chart :



This example is showing Fibonacci retracement levels and the 'hammer' price action pattern, finding support at the 23.6% Fibonacci level.



We can also add a third rule on identifying a possible target level for the trade:



Use the 161.8% Fibonacci extension level as a price target level by using the Fibonacci retracement tool and measuring from the A to B cycle, as shown here:



In this example, the price has moved higher from the 'hammer' price action pattern which formed at the 23.6% Fibonacci retracement level. However, it is yet to reach the 161.8% target level. While the trader may want the market to go the target level there is no guarantee it will. In fact, the market - at any time - could reverse the other way and change trend.



This is why risk management and using a stop loss will prove to be beneficial in the long run as it can help to minimise losses.



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How to use the Fibonacci retracement tool in MetaTrader 4

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How to use the Fibonacci retracement tool in MetaTrader 4

This is the first video of a series of 3 about Fibonacci and how to use it. Fibonacci is a trading tool use by many forex traders and it comes by default in your forex platform.

Setting up the correct Fibonacci levels using the following steps:

1. Open your MetaTrader trading platform provided by your broker.
2. From the top menu, select Insert - Objects - Fibonacci. This will show the following Fibonacci indicators:
3. The Fibonacci retracement tool is used to plot both Fibonacci retracement levels and Fibonacci extension levels. After selecting Fibonacci Retracement, your cursor will change from an arrow to a plus sign with some small horizontal lines beneath it.
4. After you click on the chart then you will find a box pop up which allows you to customise your Fibonacci levels, as shown below:
5. The 'level' column is the Fibonacci ratio derived from the Fibonacci sequence. The 'description' is how it translates into a Fibonacci level for trading.

Now let's look at how to plot Fibonacci levels on to your chart and what they actually mean.

Drawing Fibonacci retracement levels in an Uptrend

1. Find the X to A cycle which is one big cycle, or wave higher.

2. Select the Fibonacci Retracement tool from the top menu: Insert -Objects - Fibonacci -Fibonacci Retracement.

3. Left-click and hold down at the bottom of the cycle, X.

4. While holding the mouse button down, drag the line to the top of the cycle, A.

5. The Fibonacci indicator will automatically draw the Fibonacci retracement levels on, as shown below:


In the price chart above, the Fibonacci levels are plotted as horizontal lines with the Fibonacci descriptions written on the right side of the chart. You may have noticed that the X level is plotted as 100 and the A level is plotted as 0. This is because if the price retraced from point A all the way back to point X it would be a 100% retracement.

This also means that when price retraces to the 38.2 level - for example - it means that price has retraced 38.2% of the X to A move.

In an uptrend, these Fibonacci levels provide areas of support where the market could bounce higher and continue the trend up.

In the example above price did indeed find support at the 38.2% Fibonacci level. Traders will then look at other technical analysis tools such as price action patterns to find more clues on whether price could bounce at this level.

Drawing Fibonacci retracement levels in a downtrend

1. Find the X to A cycle which is one big cycle, or wave lower.

2. Select the Fibonacci Retracement tool from the top menu: Insert - Objects - Fibonacci - Fibonacci Retracement.

3. Left-click and hold down at the top of the cycle, X.

4. While holding the mouse button down, drag the line to the bottom of the cycle, A.

5. The Fibonacci indicator will automatically draw the Fibonacci retracement levels on, as shown below:
In the price chart above, the Fibonacci levels are plotted as horizontal lines with the Fibonacci descriptions written on the right-side of the chart. You may have noticed that the X level is plotted as 100 and the A level is plotted as 0. This is because if the price retraced from point A all the way back to point X it would be a 100% retracement.a downtrend, these Fibonacci levels provide areas of resistance where the market could correct lower and continue the trend down. In the example above, price did indeed find resistance at the 38.2% Fibonacci level and then correct lower. Typically, traders would look at other technical tools to further confirm the possibility of a correction lower. This will be evident in the next section as we go through a Forex Fibonacci trading strategy.

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