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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