The Fibonacci retracement is technical analysis tool, built on the sequence of Fibonacci numbers. This tool comes pre-installed on almost all graphics platforms. It acts like a traditional support and resistance area, but is derived from mathematical ratios rather than peaks and valleys. Talking about Fibonacci tools, there are many ways, but perhaps the Fibonacci retracement is the most used tool, to trade on reputable forex brokers. So, let's go to kiemtien.com to learn about how to draw Fibonacci and how to use this tool in forex trading!
How to Use Fibonacci Retracement in Forex Trading
The Fibonacci Retracement tool will promote its high efficiency when used in combination with other indicator tools. The main objective is to identify a possible pullback of the trend or find the ideal entry point. There are effective tools to match the Fibonacci Retracement:
- Trendline of the trendline.
- Support or resistance zone.
- Strong reversal candlestick patterns.
View more: Find out what is fibonacci? trade fibonacci effectively
Combined trend line
Trend lines are a very simple and very effective trend identification tool. When the market is moving in a specific trend, the Trendline will act as a resistance level. That is, if the market is in an uptrend, when the price corrects down and touches the trendline, the price will go back up and opposite to the downtrend. We use confluence, the price touches a Fibonacci Retracement level and at the same time the price touches the trendline, there is a high probability that the price will reverse.
See also: What is Trendline? Instructions on how to draw the most accurate trendline
On the GBPUSD chart, when the price starts to correct itself, you draw the Fibonacci Retracement. The previous uptrend created two bottoms, now you draw a trendline for this uptrend connecting these two bottoms as shown in the image above.
We await the next price action. When the price reaches the 0.618 Fibonacci Retracement level, it also meets the trendline, which is acting as support. Combining the two conditions, you enter a purchase order and the result is a price increase as we expected.
View more: Know what is forex? Basic knowledge of forex trading
Combined with support and resistance zones
In an uptrend market, if the price reaches a support level, there is a possibility of a bullish reversal. On the other hand, with a downtrend, the price encounters resistance with a high probability of falling. A price level is considered a strong support or resistance level if the price hits it many times and turns around.
The idea of this method is that if the price approaches one of the Fibonacci Retracement levels, and those levels have also been within important areas of support or resistance in the past, there is a high probability that the price will react. At this price level, the market ends the correction and returns to the original trend.
See also: What is support and resistance? How to identify potential support and resistance zones
Of all the Fibonacci retracement levels, 0.618 is a retracement that is located in an important resistance area because the price had already reached a top in that area. Therefore, this is considered an area of strong resistance, there is a high possibility that the price will reverse. The trading method now is to wait for the price to touch the 0.618 retracement level and then enter a sell order. And the result is that the price has reversed, back to the original general trend.
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Combined with reversal candlestick pattern
The commonly used reversal candlestick pattern can be combined with a wide variety of indicators. This is one of the very powerful methods of price action analysis. So, when combined with the Fibonacci Retracement, these two tools will help us find entry points that are more likely to win.
On the EURUSD chart, as it approaches the 0.618 Fibonacci retracement level, the price appears in a Bearish Engulfing pattern. This signal shows that the possibility of a bearish reversal is very high. After the price dropped, and then came back to test the 0.382 retracement, another Bearish Engulfing pattern appeared. If you place two consecutive sell orders in this case, you will make a lot of profit.
How to draw Fibonacci retracement
Typically, the market will move in two trends: an uptrend and a downtrend. Here we will guide you to draw Fibonacci retracement on the chart, in uptrend, in downtrend in the most simple and intuitive way.
Coloring Fibonacci retracement trunk uptrend
- Step 1: Determine the market trend, in this case, go up
- Step 2: Select the bottom point as the starting point, click on the bottom and drag right to the top as shown below.
- Step 3: Watch for 3 potential support levels of 0.236, 0.382 and 0.618.
Coloring Fibonacci retracement trunk downtrend
- Step 1: Identify the market trend, in this case it is a downtrend.
- Step 2: Select the point at the top as a starting point, click on the vertex and drag it from right to bottom to bottom bottom as shown below.
- Step 3: Watch for 3 potential support levels of 0.236, 0.382 and 0.618.
Conclusion
So, in this article, we have a little knowledge about what is Fibonacci retracement? As well as how to design and trade with Fibonacci retracement to be more effective. This is one of the “divine” tools that almost every trader uses. Practice drawing and trading on real-time charts. Don't forget to visit our forex signals page, to choose the best trading signals for yourself. Also, you can refer to the Fibonacci Extension in the next article.
View more: How to Use the Fibonacci Extension to Find Effective Profits