Fibonacci Indicator Forex Trading Strategy
The ‘Fibonacci indicator’ Forex trading strategy is one of the most well known and commonly used long term Forex trading strategies. This method relies on what is called a ‘Pullback’ and to fully understand how it works we must discuss the more fundamental concept ‘the trend’.
When we look at each price change individually it is very hard to explain them and find a pattern as there are so many of them. Looking at the bigger picture allows us to see trends on a larger scale.
The image above shows a moderately short trend which is the kind of trend that we will focus on for this trading technique. The trend is made up of three parts, two going up and one going down. Since the overall direction of the trend is up, the middle part where there is a momentary downfall is called a ‘pullback’.
The problem is that when we see a trend start to reverse it is very hard to establish if what we are witnessing is a pullback or a reversal of the trend. This is where Fibonacci comes in and allows us to very simply analyze the data and make a decision.
The Fibonacci numbers and ratios have been famous among mathematicians and artists for hundreds of years. They represent many things in nature and in financial markets and can be used as great analytical tools. No math is required to use these numbers as the trading platforms do all the calculations for us. All that we must do is make a decision based on these lines which appear on the graph.
The three most important Fibonacci numbers are 0.382, 0.5, and 0.618. Also keep in mind 0.764 and 0.236.
The Fibonacci ratios are the purple lines drawn on the chart above. By examining how far the pullback has reached on the Fibonacci scale we can determine whether the price will pull back up again or turn into a bearish trend.
As long as the price remains above the 61.8% line we can expect the trend to rise back up indicating a pullback. Once the price crossed the 61.8% line we must treat it as a start of a bearish trend which would indicate that it is time to close the position.
For example, in the chart above the pullback forms a bottom at around the 50% Fibonacci marker. This indicates that the price will most likely rise and the overall upward trend will continue.