A Variety of Fibonacci Tools for Building a Trading System
November 22, 2019
Trading platforms offered by any Forex broker in the 21st-century have many Fibonacci tools to analyze the market. The tools vary based on the trading strategy and the Fibonacci method for trading.
If you ask a trader to say something about the Fibonacci ratios quickly, most likely the answer relates around the 61.8% or other retracement levels. While they are popular among retail traders due to the use in the Elliott and Gartley theories, to name just two, there are other Fibonacci tools traders can use in technical analysis of the currency market.
The MetaTrader4, the most popular trading platform among retail Forex traders, but also other trading platforms, offer the following Fibonacci tools to use:
- Fibonacci Retracement
- We already mentioned the Fibonacci Retracement tool. Very popular in Forex trading, traders use it by dragging it from the top to the bottom of a market swing to find the 23.6%, 38.2%, 50%, and8%. The bigger the timeframe, the stronger the support provided. In a bearish market swing, traders use the ratios to sell the spikes into the Fibonacci ratios.
- Fibonacci Expansion
- The Fibonacci Expansion tool is widely used in Forex trading, especially in the Elliott Waves Theory. When the market travels in the extended wave, traders look for 161.8% level, which is the minimum distance for the extended wave to travel. Also, the 138.2% and 261.8% are essential levels: the first one tells what type of the flat pattern the market forms, and the second one shows if a triangle is irregular or just a classic horizontal triangle
- Fibonacci Fan
- Based on the same ratios, the Fibonacci Fan is a series of lines that have the angles between them respecting the Fibonacci ratios. They provide tremendous dynamic support and resistance levels.
- Fibonacci Arcs
- The arcs show pretty much the same thing (dynamic support and resistance that follows the arc of a circle, and the distance between them is given by various Fibonacci ratios
- Fibonacci Time Zones
- An incredible trading tool, the Time Zones tool puts the Fibonacci ratios in active relation with the time it took a pattern to form. Extremely popular in the Forex market due to the ability to forecast future market turns by using a pattern recognition approach, the Fibonacci Time Zones tool project the time on the right side of a chart by measuring the time of a pattern.
Conclusion
By now, I’m sure you’ve understood how vital the Fibonacci tools are for the Forex trader. In technical analysis, they play a tremendous role in bringing essential concepts and trading theories together.
They have a vast application also when trading from a pure price action point of view. By merely measuring tops and bottoms and looking for the 61.8% or other Fibonacci ratios, traders have an educated guess where the market might turn and prepare accordingly.
Perhaps the most critical use of the Fibonacci ratios is in Elliott Waves Theory. Effectively, it connects the logical process in such a way that trader can forecast future prices merely using the most important Fibonacci levels.