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PR14 - How to Use Fibonacci Retracement to Enter a Trade

"The Fibonacci based retracement method is one of the most common ways for trend traders to trade a trend. Using the retracement levels based off the Fibonacci numbers, traders are able to pick the turning points in the price. This gives them the optimal price point from which they can enter into a trend. While it sounds simple, to perfect the art of picking turning points in price, requires a lot of practice. In this article we show you how you can use the Fibonacci retracement tools in order to find the turning points in the trend. You will have to make use of two other technical indicators in order to build this. The Fibonacci retracement method can be in itself a complete trading system. But before that, we also give you an introduction on how to configure your Fibonacci retracement level. Find out how you can use the Fibonacci retracement tool to trade the trends more effectively."

Fibonacci retracements are based on measuring a wave. A wave is nothing but the starting point to the end point in a price action structure. For example, if price moves from 1.1000 to 1.1500, that is a wave movement, as long as price moves in this direction.

Traders use Fibonacci retracement levels to predict where a price correction can occur based off the retracement levels. The most commonly used tool to measure the Fibonacci retracements is the Fibonacci retracement tool on your MT4 trading platform.

Using the Fibonacci levels, traders can identify potential support and resistance levels. Then, when a correction occurs in the price, the security moves in the opposite direction. Generally, you can expect to see a correction or a reversal of the correction taking place at one of the retracement levels.

The Fibonacci retracement tool can be a handy tool to pick turning points in price. For example, when you are measuring a wave that is in the uptrend, using the Fib tool you can get the retracement levels.

Then based on some indicators such as the oscillators, you will be able to identify the price levels where you can expect a reversal to take place. This is nothing but the retracement levels.

How to use the Fibonacci indicator tool in MT4?

The Fibonacci indicator tool in MT4 can be found from the Insert > Fibonacci > Retracement selection. You can also customize your MT4 trading platform to have this indicator displayed on the menu bar itself.

PR14 01 Fibonacci Configuration

Fibonacci configuration, MT4


Once you have located the Fibonacci retracement tool, the next step is in knowing how to draw it. You should follow these simple rules outlined below.

When you are measuring an uptrend (price is moving from the bottom left to the top right), then select and hold the first lower point on the chart and drag the tool all the way to the higher end.

In other words, you will be drawing from left bottom to the right top corner.

This will give you the Fibonacci levels of 61.8% and 38.2%, which are nothing but retracement levels.

Similarly, when you are measuring a downtrend (price moves from top left corner to bottom right corner), then select and hold the first lower point and drag the tool to the top left corner of the trend.

In other words, to measure a downtrend, start from the low point on the right and then drag the indicator to the high point on the left. Here, you will be drawing from the right lower corner to the top higher left side.

This will give you the Fibonacci levels.

In both the cases, notice that when you plot the uptrend, you will get the retracement levels which will act as support. In the second instance, the Fibonacci levels will act as resistance.

There are a number of Fibonacci levels that you can use. In fact, if you are using the MT4 Fibonacci retracement tool for the first time, you will find a number of different levels. You can delete these and only stick to the very basic of 61.8% and 38.2%.

To do this, first double click on the indicator that you have drawn and select the Fib Properties. This will open the configuration window. Click on the Fibo levels and select the levels that you want to delete and click delete.

If you want to modify the levels, then double click on the entry and adjust the levels to your choice.

Trading retracements with the Fibonacci tool

Once you know how to draw and use the Fibonacci tool, you should then begin by looking for the trend. Once a trend is established, find the key pivot highs or lows in a price wave. Then, draw the Fibonacci tool to identify the support and resistance levels.

You can also make use of oscillators to find the turning points in price alongside looking at the reversal candlestick patterns that form near one of the Fibonacci retracement levels.

PR14 02 Fibonacci Retracement

Using the Fibonacci retracement tool


In the above chart, you will find the Fibonacci retracement tool. We make use of the 50 and 200-day moving average along with the Awesome oscillator. You will see that after price start to decline from the highs, there was a minor retracement.

This was just below the 38.2% Fibonacci retracement level. But at the same time the Awesome oscillator turns strongly negative indicating that the trend is to the downside. Then, the bearish crossover of the two moving averages give the signal for a potential move to the downside.

Using the Fibonacci retracement levels, traders are therefore able to find the turning point in a trend.

Read 1017 times Last modified on Sunday, 14 July 2019 08:45