Fibonacci Forex Trading ToolThe Fibonacci Forex trading tool is by far my favorite trading tool, not because I am a math enthusiast but simply because I believe that it is without a doubt one of the most accurate tools you should integrate in your trading system to profit massively. So what or should I say who is Fibonacci? The Fibonacci Forex trading system was developed by a man by the name of Leonardo of Pisa also known as Fibonacci. He was a great, albeit geeky, Italian mathematician who discovered a series of numbers where each new number was a sum of the previous two numbers. These numbers had, according to his experiment, a recurring effect. Those numbers are 0,1,1,2,3,5,8,13,21,34,55… Adding the first two numbers will give the third number and adding the second and third number gives the fourth number and so on… It looks very simple on the surface but the further you try to understand the concept of the Fibonacci the more complicated it gets. In our case, we don’t need to break it down further. We will stick to this information and move on in our discussion. Fibonacci Forex trading levels: The only two Fibonacci Forex trading levels you must be familiar with are the: • Fibonacci retracement Fibonacci retracement levels consist of the following numbers:0,0.236, 0.382, 0.500, 0.618, 0.764,100. The extension levels consist of:0, 0.382, 0.618, 1.000, 1.382, 1.618 Before we go into more details on each of those Fibonacci Forex trading tools lets have a look at how they would look like when placed on a graph. Below is a Daily chart of EUR/USD, with a Fibonacci retracement tool added:
And now...here is a Daily chart of EUR/USD, with a Fibonacci expansion tool added: 
Now that we have seen how they look on a chart. Let’s see how we actually use those tools. They are used by traders to: • Identify support and resistance levels A word of advice here is to always look at the bigger timeframe. I find it easier to find support and resistance on bigger timeframes where the trend has already been defined. This makes it easy to spot the right levels where you may shift to a smaller timeframe (when confirmation is obtained from bigger timeframe) to place a trade with a tighter stop loss and ride the wave of profit. Most software that you will come across will have a built in tools section that you may use to your convenience. No tedious calculation is expected from you as everything is done to make your life (and my life too) easier. Fibonacci retracement: Open a graph of any currency of your choice, preferably a 4-hour chart (or higher) and place the Fibonacci retracement on the chart. You will have to identify the latest swing high and swing low first. Then simply connect the high to the low and you will see the various levels with the Fibonacci numbers on them. These will act as support and resistance levels.
As you may be able to see from chart, the price retested the 50 level where it experienced a major support. It then made its way to retest previous high (marked as level 100) where price broke resistance line. This break was followed by a retest of level 100 which tuned into a support line. Price went below the 100 level for a period of time to finally reverse and move all the way up too level 161.8. This is the power of the Fibonacci retracement. To this day, it still amazes me to the accuracy of those price retests on some particular levels such as the 50 level. Well, when we think about it, the majority of traders around the world do have an eye on those levels. However, this does not mean that you will be right all the time. All indicators have their flaws and Fibonacci is not immune to that. Thus, those support and resistance level will not always give you good buy or sell signals. It may happen that the retests are not successful and price moves all the way below the support or all the way up breaking any resistance level. My advice is not to guess the price movement. You don’t want to base your trades on speculation. Use an extra indicator and jump in the trade when it’s the right time so that all the chances of profiting are stacked on your side. Fibonacci extension: The Fibonacci extension is used for profit taking. Open a chart of your currency of choice. Place this indicator on your chart by clicking on the last swing low, then to the most recent swing high and finally to the retracement swing low. It should look something like chart below.
As you can see on the chart above, in an up trend the prices will find resistance on the extension levels. If resistance is strong enough, prices will break those lines and move further up to level marked as Target 1, 2 and 3 (only if up trend is a strong one) In the case of a downtrend the reverse will be true, that is you should identify swing high, then swing low followed by retracement swing high where drawing is done in same way as above. Profit target will stay the same too. Be wary that this is not always an accurate way of trading if you base all your trades solely using the Fibonacci forex trading indicator. Use indicators such as the 50 SMA and stochastic, to further support/confirm your trading decisions. Now that you have a solid idea of the basics of applying this tool, let's see how big profits can be made in real-world scenario: Happy trading, Top of: Fibonacci Forex Trading Page Back to: Forex Charts Page Back to: Forex Trading domain Homepage
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