Effective Trading System Based on Fibonacci Levels | Apexum

Insights

Effective Trading System Based on Fibonacci Levels

June 17, 2019

A Forex trading system that works is one that combines technical and fundamental analysis. However, it is not enough to continually make a profit, if there is no money management plan too.

The main use of a Fibonacci method for trading is to find out support and resistance levels. Support and resistance in Forex come in two shapes:

  • Horizontal or classic levels
    • These are levels obtained by measuring the previous move and dragging a Fibonacci Retracement tool from top to bottom (in a bearish move) to find out resistance at Fibonacci levels or from bottom to top (in a bullish move) to find out support at Fibonacci levels. These are horizontal areas (not lines!) where the price finds it challenging to get through.
  • Dynamic levels
    • A dynamic support or resistance level is one the follows the price closely. It rises or falls with the price action and have great use in Forex trading.

Fibonacci Levels to Trade Horizontal Support and Resistance

Trading the currency market is a speculation. Traders use all kinds of trading techniques to find levels with a great probability of a bounce.

Fibonacci ratios are such tools. In the case of horizontal support and resistance, the bigger the timeframe is, the stronger the levels.

This is the EURUSD weekly timeframe. It’s quite a big timeframe, so any support or resistance area should be treated with respect.

The way to find out future support and resistance is to follow these steps:

  • After a bearish market move (like the one we see above) use a Fibonacci Retracement tool and drag it from top to bottom
  • Identify the 38.2%, 50% and, most important, the 61.8% levels
  • Mark them as areas where the price might react
  • Exit/enter the market at the Fibonacci levels

Fibonacci Levels to Trade Dynamic Support and Resistance

As mentioned earlier, dynamic support and resistance levels follow the price closely. The Forex market may still make new lows (in a bearish trend) or new highs (in a bullish trend), but the dynamic levels will keep following the price action.

The easiest way to understand dynamic levels is to use the same chart offered by the Forex broker but this time to use a different Fibonacci tool: the Fibonacci Fan.

After dragging the tool from top to bottom, the resulting Fibonacci ratios represent dynamic levels. They act as resistance that turns into support or support that turns into resistance.

Once again, dynamic levels are much more powerful than horizontal one, for the simple reason that they follow the price. The market may still trend lower and make new lower lows (assuming a bearish trend) but won’t turn until it manages to break the resistance given by the 38.2%, 50% or 61.8% ratios.

Conclusion

A trading strategy that uses Fibonacci levels depends very much on how traders drag the tools. Using the tops and bottoms is the preferred method, but not the only one. Integration with other trading theories, instead, makes the Fibonacci ratios much more interesting to use.

Comments are closed.