IMPORTANT: A Fibonacci levels indicator works much better when there is a trend on the Forex market.
The basic idea of the Fibonacci trading levels is to open a long position during the market’s retracement from the Fibonacci support level, and a short position should be opened during the retracement from the Fibonacci resistance level when the market is falling.
Fibonacci retracement levels
To determine the Fibonacci Forex levels, you need to find a recent high and low of the latest price movements. For a downward trend, click and drag from the maximum of the Fibonacci level to the minimum. For the upward trend do the opposite: Click on a minimum price level and drag the cursor to the maximum.
Watch the short video below created by an investment analyst of eToro Matti Greenspan. Matti shows how to use and apply the Fibonacci levels:
Now let’s look at examples of how to apply Fibonacci retracement levels on the market.
A Bullish trend
Let’s look at the daily chart of AUD / USD:
On this graph, we found Fibonacci levels by clicking on the low price point of 0.6955 and moving the cursor to the high point of 0.8265. Walla! The technical analysis indicator shows us the Fibonacci levels. Now, logically thinking, the Australian dollar will start a correction moving down from the maximum level and will find support on one of these levels. Therefore many Forex traders will place orders to buy at these levels.
Now let’s see what happened next:
The price found support at the Fibonacci level of 23.6% and continued to rebound from it during the next few weeks. Next, the pair tested the support level at 38.2%, but failed to proceed further down. Later, the Aussie continued its upward movement and eventually broke through the level of the maximum price. This example shows that opening a buy trade on the level of 38.2% would be a very lucrative long-term deal.
A Downward trend
Now, let’s look at how we use the Fibonacci trading levels when the market controlled by bears. Look at the 4-hour chart AUD / USD below:
So, we found the price highest point and its minimum point. If there is a downward trend, we should wait for the correction upwards from the low point and catch the market’s retracement from one of the Fibonacci resistance levels because many traders will sell off these levels.
Let’s see what happened next:
Look at this beauty! The market reached the Fibonacci level of 50%, tested it, and turned down. If you had sold on this level, you would make great profits. Even thought if you would sell on the level of 38.2% you would still stay in a positive area.
In the above examples, we can see that the price has found support or resistance at Fibonacci levels. This is because many traders are using this amazing tool (Fibonacci retracement levels) in their Forex trading.
But there is something that may upset you a little. Price does not always bounce from these levels. These levels should be considered as a certain area where the price is likely to rebound. However, you should always remember about a Fibonacci indicator, because it is easy to use and is very effective when it comes to currency trading.
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P.S. eToro’s professional trading charts offer Fibonacci levels indicator as well as lots of other amazing trading tools to help you analyse the market and make correct trading decisions.