The Fibonacci indicator is a very powerful tool in Forex trading. It provides important levels that can be used individually in conjunction with other indicators and methodologies such as Candlestick Patterns, Price Charts, RSI, MACD, Momentum etc, and that levels can be used to establish entry points, Stop loss levels and Take Profit levels.

The Fibonacci indicator can be plotted over any time frame including 5 min, 1hr, 4hr, daily etc.

The traditional way to plot and analyze the price with Fibonacci involves looking back at the historical prices to identify the most important highs and lows. Depending on the temporality that is used to trade the market this would involve seeing more historical data to locate those levels that will be the reference to the Fibonacci retracements and extensions. The convergence of different Fibonacci levels can occur if the levels are placed on graphs of different Time Frame, when doing this can exist a convergence and the level become more relevant.
In this guide for quick use of the Fibonacci indicator we have the following points:
  • Main Levels 
  • Fibonacci and Candlestick Patterns 
  • Fibonacci and Charts 
  • Fibonacci and Indicators 
  • Fibonacci and  ABCD Waves 
  • Fibonacci Strategy

Main levels of Fibonacci

We will not go into details of how are calculated these leveles and the story about Fibonacci numbers, but the main levels that are taken into account are:
  • From 0% to 100% to determine the main movement 3
  • 38.2%, 50%, 61.8% and 78.6% for retracements or corrections.
  •  127%, 161.8%, 200% and 261.8% for the extensions.
Fibonacci retracements and extensions
When the market has made a strong bearish or bullish movement, it is typical that it perform a retracement to reconstitute its forces and then carry out a continuation of the movement. The market will not always reach Fibonacci levels exactly. For example, the price in ocaciones can reverse its direction in the middle of the levels of 50% and 61.8%. The price can also move with a strong boost and reach a higher Fibonacci level (extension).

The 61.8% and 76.4% are very typical levels in which the market makes the maximum retracement and then continue with the original movement.
Retracements of Fibnacci levels

Fibonacci and candlestick patterns

You can combine Fibonacci with the methodology of candlestick patterns to find entry points in the market. In particular, reversal patterns should be sought in the levels zone where the retracement direction changes (50%, 61.8%, 78.6), and these reversal patterns can be found in the following candlestick pattern manual.

Once you have identified what you should look for, we have the following example:
  • The blue line allows us to identify the main movement. 
  •  The green line shows a market retracement to the level of 50%.
  • Just at the 50% level a pattern called "Engulfing Candlestick" is formed. Here a ahort position is opened as the market performs a reversal pattern after the retracement movemet, which allows to trade in the direction of the main movement and take advantage of all the extension.
Retracement candlestick pattern on Fibonacci levels

The example serves as a reference and the market can make other reversal patterns and in other levels as 61.8%, 78.6% even in levels such as 38.6%. That is why every time the market is close to these levels is important to pay special attention to the possible formation of those candlestick patterns.

Fibonacci and chart formations 

You can combine Fibonacci with the methodology of chartist formations to look for entry points in the market. In this case we should generally look for trend change formations in the zones of the levels where the reversal direction change most of the time (50%, 61.8%, 78.6).

Once you have identified what you should look for, we have the following example:
  • The blue line allows us to identify the main movement. 
  • The green line shows a price retracement up to the 50% level.
  •  In the retracement has formed a typical chartist formation, a bearish channel which can be used when the a breakout (red circle) occurs. In this point we should open a long position and apply a Take Profit according to the theory of this chartist figure or in its default trade the extension taking into account the market reversal when the price reach the 50% retracement.
Broken Bearish Channel near Fibonacci levels
The example serves as a reference and the market can make other reversal formations and in other levels as 61.8%, 78.6% even in levels such as 38.6%. For example, some chartist formations that we can find are Double Bottoms, Double Tops, Triple Bottoms, etc., and whenever the market is close to these levels take special attention to the possible formation of these price patterns.

Fibonacci levels with a Double Bottom

Fibonacci levels and Technical Indicators

You can combine Fibonacci with the use of indicators such as RSI, MACD, Momentum and other to confirm entry points in the market. In this case traders should usually look for convergences with the formation of chart patterns or reversal candlestick patterns in the zone of the levels where the reversal direction change most of the time (50%, 61.8%, 78.6). 

Once you have identified what you should look for, we have the following example:
  • The indicator shown in the image is a RSI of 14 periods and gives a buy signal when it crosses the central line.
  • The buy signal provided by the breakout of the bearish channel (chartist formation) is confirmed.
RSI signals combined with Fibonacci

The example serves as a reference as the market can make other chart formations and reversal candlestick patterns and at other levels such as 61.8%, 78.6% or even at levels such as 38.6%. Each the market is close to these levels traders should pay special attention to the possible formation of these formations and patterns, also you can maximize your trading results by applying a MACD, RSI, Momentum, or even moving averages where the price can rebound, in such a way that there is that convergence necessary to enter the market.

Fibonacci and ABCD Waves

Basically Fibonacci is connected to the ABCD waves, the "A" point being the beginning of the main movement and "B" point  the end of the main movement, the path from point "B" to point "C" will be the retracement and this point will be located at 50%, 61.8% and 78.6% levels, whie the path from point "C" to point "D" will be the extension or continuation of the main movement. 

Market entries when the trader wants to enter in the direction of the trend are generally sought at point "C" by any of the methods explained above.
ABCD wave example


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