Advanced Fibonacci Trading Strategy PDF
Advanced Fibonacci Trading Strategy PDF
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What is Fibonacci?
We will use the Fibonacci ratio in our trading, so you better learn and
love it like you love the cooking at your mother's home.
After the first few numbers in the sequence, if you measure the ratio
of any sum to the next higher number, you get 0.618. For example, 34
divided by 55 equals 0.618.
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If you measure the ratio between alternate numbers, you get 0.382.
For example, 34 divided by 89 equals 0.382, and it goes into the
explanation as we will discuss.
This ratio is called the "Golden Mean." Okay, that's enough jibber-
jabber. With all the numbers, you can make an elephant fall asleep.
The bottom line is, this is the ratio you MUST know:
Fibonacci Retracement Levels 0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels 0, 0.382, 0.618, 1.000, 1.382, 1.618
You don't really need to know how to calculate all of this. Your
charting software will do all the work for you, like some indicators in
MT4. However, it's also good to be familiar with the basic theory
behind the indicator so that you will have the knowledge to impress
your girlfriend.
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Swing High is a candle with at least two higher highs on both its left
and right sides.
Swing Low is a candle with at least two lower lows on both its left
and right sides.
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Fibonacci retracement
The first thing you need to know about Fibonacci tools is that they
work best when the market is trending.
The idea is to buy long (or buy) on the retracement at the Fibonacci
support level when the market is trending up, and to sell short (or
sell) on the retracement at the Fibonacci resistance level when the
market is trending down.
To find the retracement level, you should look for significant levels of
Swing Highs and Swing Lows. Then, for a downtrend, click on the
Swing High and drag the cursor to the latest Swing Low.
For uptrends, do the opposite. Click on the Swing Low and drag the
cursor to the latest Swing High.
Got it? Now, let's look at some examples of how to apply Fibonacci
retracement levels in the market.
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Uptrend
This is the daily chart for AUD/USD.
As you can see from the chart, the retracement levels are 0.7955
(23.6%), 0.7764 (38.2%), 0.7609 (50.0%), 0.7454 (61.8%), and 0.7263
(76.4%).
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As you can see from the chart, the retracement levels are 1.1822
(23.6%), 1.1854 (38.2%), 1.1887 (50.0%), 1.1919 (61.8%), and 1.1952
(76.4%).
Now, our expectation is that if EUR/USD retraces from its recent low,
it will find resistance at one of the Fibonacci levels because traders
will place sell orders at these levels if the price goes up again.
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Downtrend
Now, let's see how we will use the Fibonacci retracement tool during
a downtrend. Below is the 4-hour chart of EUR / USD.
As you can see, we found a Swing High at 1.4195 on the 26th and a
Swing Low at 1.3854 a few days later on February 2nd. The
retracement levels are 1.3933 (23.6%), 1.3983 (38.2%), 1.4023
(50.0%), 1.4064 (61.8%), and 1.4114 (76.4%).
The hope is that if the price retraces from this low, it will face
resistance at one of the Fibonacci levels as traders will be ready with
sell orders there.
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The market did try to rally, stalled below the 38.2% level, just before
testing the 50.0% level. If you had some good orders at the 38.2% or
50.0% levels, you would be rich!
In the two examples above, we saw that prices found some support or
resistance temporarily at Fibonacci retracement levels. As most
people use Fibonacci tools, those levels become self-fulfilling.
One thing to note is that prices will not always bounce off these
levels. They should be viewed as Interest Zones or as "KILL ZONES".
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In the next lesson, we will show you what can happen when
Fibonacci levels fail.
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Here, you see that the pair has been in a downtrend, so you decide to
use your Fibonacci tool to help you find a good entry point. You use
the Swing High at 1.5383, with the Swing Low at 1.4799.
You see that the pair has stalled at the 50.0% level for several candles.
You tell yourself, "Wow..., this 50.0% fib level! The price is held! It's
time to sell short!"
You sell short in the market and start dreaming that you will ride a
new BMW Z3 car with a soap opera star to the top.
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Now, if you really placed a sell order at that level, not only will your
dreams go up in smoke, but your account will take a serious hit if you
don't manage your risk properly!
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It turns out that the Swing Low was the bottom of the downtrend and
the market started to rally above the Swing High point.
What lesson can we learn from this?
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The bottom line is that there is no right and absolute way to do it,
especially when the trend on the chart is not so clear. Sometimes it
becomes a guessing game.
That's why you need to sharpen your skills and combine Fibonacci
tools with other tools in your forex toolkit to help provide a higher
probability of success.
In the next lesson, we will show you how to use Fibonacci tools in
combination with other forms of support and resistance levels and
candlestick patterns.
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While Fibonacci tools are very useful, they don't have to be used
alone.
If the fib level is a support and resistance level, and you combine
them, then the likelihood of the price bouncing off that area is much
higher.
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Let's take a look at an example of how you can combine support and
resistance levels with Fibonacci levels. Below is a daily chart of
USD/CHF.
As you can see, the chart has recently been in an uptrend. Look at all
those green candles! You decide that you want to get on the
USD/CHF train.
But the question is, "When do you enter the market?" You use the
Fibonacci tool, placing a swing low at 1.0132 on January 11th and a
swing high at 1.0899 on February 19th.
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Now your chart looks pretty sweet with all those fib levels.
You look back a bit and you see that the price of 1.0510 is a good
support level in the past and it happens to line up with the 50.0%
Fibonacci retracement level.
Now that it has been broken, it could turn into support and become a
good place to buy.
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If you place a buy order around the Fib 50.0% level, you will
definitely be very happy!
There will be some quite tense moments, especially during the second
test of the support level on April 1st. The price attempted to break
through the support level but failed to close below it.
Eventually, the pair broke its last swing high and resumed its
uptrend.
You can set up the same thing for a downtrend as well. The key is to
look for price levels that appear to have significant zones in the past.
If you think about it, there is a higher chance that the price will
bounce off these levels.
Why?
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First, support and resistance are good areas to buy or sell because
other traders will also be watching these levels like hawks.
Second, because we know that many traders also use Fibonacci tools,
they may be looking to jump in with the fib level itself.
With traders looking at the same support and resistance levels, there
is a good chance that there are tons of orders at one price zone.
Although there is no guarantee that the price will bounce from that
level, at least you can be more confident in your transaction.
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Another tool that works well with Fibonacci is trend lines. After all,
Fibonacci levels work well when the market is trending, so this
makes a lot of sense!
So why not look for levels where the Fib level touches the trend?
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Here is the AUD/JPY H1 chart. As you can see, the price has been
respecting the short-term trend line for several days.
You think, "Hmm, that uptrend looks very nice as I want. Buy
AUD/JPY, even if it's just for a short-term trade. I will buy if it
touches the trend line again."
That's right!
The only way to know if the Fibonacci levels at 61.8% and 50.0%
have the potential to act as support is to wait and see if the price
bounces off those levels.
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If the price does bounce off those levels and continues to follow the
uptrend, then it would confirm that the levels are indeed acting as
support.
Look, the Fib level of 61.8%, the price bounced there before rising
again. If you had placed an order at that level, you would have had a
perfect entry!
A few hours after touching the trend line, the price soared like
Astroboy, breaking through the swing high.
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Aren't you glad you have this in your forex toolbox now?
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In this lesson, we will teach you how to combine Fibonacci tools with
your knowledge of Japanese candlestick patterns that you learned in
class 2.
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This pair seems to have been trending downwards last week. Will
there be an opportunity to enter this trend? You know what that
means. It's time to take out the Fibonacci tool and get to work!
As you can see from the chart, we have set the Swing High at 1.3364
on March 5, with the Swing Low at 1.2523 on March 7.
Since it's Friday, you decide to stay calm and stop trading, and decide
when you want to enter after you see the chart after the weekend.
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Whoa! When you opened the chart, you saw that EUR/USD had
lifted slightly from Friday's closing price.
At the Fib 50.0% level, the buyers finally lifted the price higher. You
decided to wait and see if the Fib 61.8% level would hold.
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A long-legged doji has formed and retraced back to the 61.8% Fib
level. If you recall from class 2, you'll know that this is a "reversal"
signal. Is it time to sell?
You can never know for sure (that's why risk management is so
important), but the likelihood of a reversal looks very possible!
A long-legged Doji has formed and retraced back to the 61.8% Fib
level. If you recall from class 2, you'll know that this is a "reversal"
signal. Is it time to sell?
You can never know for sure (that's why risk management is so
important), but the likelihood of a reversal looks very possible!
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Right after the Doji was formed, the price paused briefly before
heading straight down.
Look at all those red candles! It seems that buyers were indeed quite
exhausted, allowing sellers to jump into the market and take control.
Eventually, the price fell back to the Swing Low around 500 pips!
Another nice thing about fib sticks is that you are not limited to fib
levels.
You can use your knowledge of candlestick formations. You can wait
for a fib stick to form just below or above the fib level to provide
further confirmation on whether you should place an order.
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Fibonacci Extensions
The next use of Fibonacci will be to determine targets. It should
always be remembered when we trade – "If in doubt, know when to
get out!" Let's start with an example in an uptrend condition.
First, click on a significant Swing Low, then drag your cursor and
click on the most recent Swing High. Finally, drag your cursor back
and click on one of the retracement levels.
This will display each of the Price Extension levels that show good
ratios and corresponding price levels. Pretty neat, huh?
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The Fib 50.0% level was held strong as support and, after three tests,
the currency pair finally continued its uptrend.
In the table above, you can even see the price rise past the previous
Swing High. Let's use Fibonacci extensions to see where a good place
would be to take profit.
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• A few days later, the price rallied again before finding resistance at
the 161.8% level.
As you can see from this example, the 61.8%, 100%, and 161.8%
levels are good places to take profits.
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Here, we see a doji formed right below the 61.8% Fib level. The price
then reversed back to the swing low.
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Let's place the fib extension tool to see where a good place is to take
profit.
Here's what happens after the price reverses from the Fibonacci
retracement level:
• The 61.8% level also becomes a support area, before the price falls to
test the previous Swing Low
• If you look ahead, you will find that the 100% extension level also
acts as support
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We can take profits at the 38.2%, 50.0%, or 61.8% levels. All levels
act as support, possibly because other traders are also watching these
levels for profit-taking.
You should use your discretion in using the Fibonacci extension tool.
You should assess how much longer the trend will continue.
Then, we will teach you methods to help you determine the strength
of a trend.
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You cannot simply enter the market based on Fib levels without
knowing where to exit. Your account will be blown, and you will
forever blame Fibonacci if you trade without a stop loss, cursing its
name in Italian.
In this lesson, you will learn some techniques for placing stop loss.
The first method is to place a stop loss at the next Fibonacci level.
If you plan to enter the market at the Fib level of 38.2%, then you
will place a stop loss beyond the level of 50.0%.
If you feel that the level of 50.0% will be breached, then you should
place a stop loss at the level of 61.8% and so on. Simple, right?
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If you have an order at 50.0%, you can place your stop loss at the Fib
level of 61.8%. The reason is that you believe the level of 50.0% will
act as a resistance point.
Therefore, if the price moves above this point, it means you are
wrong. The price may spike, stop you out, and eventually go in the
direction of your order. If this happens, we usually go to a corner and
start banging our heads against the wall.
We just want to warn you that this may happen, sometimes multiple
times in a row, so make sure you limit your losses quickly and let
your orders follow the trend. It may be better if you use a type of
short-term stop loss method.
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Now, if you want to be a little bit safer, another way to set your stop
loss is at the recent Swing High or Swing Low.
This type of stop loss placement will give your trade more room to
breathe and provide a better opportunity for the market to move in
support of your trade.
If the market price surpasses the recent Swing High or Swing Low, it
indicates that a trend reversal has occurred.
This means that your trade or setup is invalidated and that you are
already too late to jump in. Setting a larger stop loss may be best used
for long-term and swing trading, and you can also combine this with
the "scaling in" method, which you will learn later in this course.
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Of course, with a larger stop loss, you should also remember to adjust
your position size accordingly. If you tend to trade with the same lot
size, you may experience significant losses.
Remember, stop loss placement is not an exact science, but if you can
tilt the odds in your favour by combining multiple tools, it can help
provide you with a better exit point, more breathing room for your
trades, and potentially better profits with lower risk.
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Fibonacci Summary
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As many traders watch the same levels for buying and selling,
Fibonacci levels can become a self-fulfilling prophecy.
Once again, because so many traders pay attention to these levels and
place their orders, this tool tends to become a self-fulfilling prophecy.
To apply Fibonacci levels to your chart, you must identify the Swing
High and Swing Low points.
Swing High is a candle with at least two lower peaks on both the left
and right sides.
Swing Low is a candle with at least one higher point on both the left
and right sides.
The probability of success can be increased when using the Fib tool
with other forms of support and resistance, trend lines, and candle
patterns for order and stop loss.
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With the US Bank Secret System, you can make informed trading
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