Fibonacci is a big subject and there are many different studies on it, but we will stick to two things: retracements and extensions. Let’s start with the history of the Fibonacci indicator series.

In 1240, Leonardo Pissano Fibonacci discovered a series that he named after himself, the Fibonacci series. This series was used to answer a classic math problem about rabbits. The rabbit question went like this:

A man places a pair of Rabbits in a place surrounded by a wall so that it is isolated from the outside world. How many pairs of rabbits will be produced if one pair of rabbits produces another pair of rabbits that will also be productive the following month and so on?”

Then Fibonacci managed to solve it by creating a series known as the Fibonacci series. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… This is the series that answers the rabbit problem. So the answer to the rabbit is 144 pairs, which is in the 12th series. It is obtained by adding the previous 2 series, which is 89 + 55

After the first few numbers in the sequence, if you measure the ratio of any number to the next higher number, you will get 0.618. For example, 34 divided by 55 equals 0.618.

If you measure the ratio between alternate numbers you get 0.382. For example, 34 divided by 89 = 0.382. This ratio is called the “Golden Mean”. In essence, this is the ratio you need to know:

1. Fibonacci Retracement Levels

  • 0,236
  • 0,382
  • 0,500
  • 0,618
  • 0,764

2. Fibonacci Extension Levels

  • 0,382
  • 0,618
  • 1,000
  • 1,382
  • 1,618

Traders use Fibonacci retracement levels as potential support and resistance areas. Traders use Fibonacci extension levels to take profit levels. In order to apply Fibonacci levels to your chart, you must identify Swing High and Swing Low points.

Swing High is a candlestick that is located between the higher candlesticks on the right and left. While Swing Low is the opposite of Swing High, namely the lower part compared to the candles on the right and left.

Fibonacci Retracement

Fibonacci Retracement is one of the leading indicators used to predict future price movements in currency pairs. This indicator can be used in different trading markets such as stocks, ETFs, futures and forex.

So how to use fibonacci retracement in Forex Trading? If you draw a line from the high and low, you have what is called a Larger Movement.

The purpose of using the Fibonacci indicator is to find market movements or trends that will occur. Trend means that the high price/point and the low price/point already exist referring to the previous point. You can also use Fibonacci on a smaller time frame on the chart.

However, the larger the timeframe used, the stronger and more accurate the signal given. So, here we have determined the high and low points. Then we will draw the Fibonacci line in the direction of movement, namely we draw the line from top to bottom.

Then the Indicator will draw an automatic percentage of that move. It will draw a line at the 50% retracement. 50% retracement means that if price retraces back to that line it has retraced 50%. There are other percentage retracements, but 38.2%, 61.8%, 78.6%, these are the most commonly used retracements in forex trading.

There are two ways to trade using Fibonacci:

  • When the pair retraces to one of the percentage lines, you trade back in the original direction. In this case the pair retraces back and touches the 38.2% retracement. At this point we will sell. We will use the 50% retracement line as a stop loss. If the 38.2% line is broken then you proceed to the next trading method.
  • If the retracement line breaks/penetrates then it turns into a support line that will hold the currency pair to continue to retrace. The next retracement line is the 50% retracement. In this case once again the currency pair tries to break through the next retracement line, you can go towards the next retracement line. In this case we will buy at the 38.2% retracement with a take profit target at the 50% retracement line.

Fibonacci Extensions

You determine the Fibonacci extension levels by using (3) three mouse clicks. First, click on a significant Swing Low, then drag your cursor and click on the most recent Swing High.

Finally, drag your cursor back and click on one of the retracement levels. This will display each of the Price Extension levels that show good ratios and corresponding price levels.

An example of this can be seen on the USD/CHF chart below.

The 50.0% Fib level held strong as support and, after three tests, the currency pair finally resumed its uptrend. In the chart above, you can also see the price rising through the previous Swing High. Fibonacci extensions can be used to see where a good place to take profit is.

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