Every trader knows that the MT4 terminal contains a large number of various technical tools, each of which can be useful in trading. However, only a few apply them on a daily basis, the rest do not know how to use them correctly. One of these possibilities is the Fibonacci level, which, if properly constructed, helps realize successful trading. That is why it is important to learn how to build such lines correctly, as well as to get acquainted with some levels.
What is the Fibonacci helix?
Back in the 13th century, the famous mathematician Leonardo Fibonacci identified numerical sequences that are observed in all natural phenomena. The Fibonacci spiral is formed each time you add the previous numeric value to the next one. If we divide the previous number into the next one, one can always get approximately the same value - about 0.618. The revealed pattern, which was called the “golden section”, began to be applied over time and in trading as soon as the tool for determining Fibonacci levels appeared on the Forex market. How are they used in currency trading? Fibonacci lines are used to find resistance and support levels, as well as to set take profit parameters. At the same time, no independent calculations are needed for the trader - the program does this automatically.
How is the construction of Fibonacci retracement levels?
Fibonacci lines are used to search for the end of the correction and the subsequent continuation of the trend. This means that entry into transactions based on Fibonacci levels is possible only in the direction of this trend. To draw the data lines on the chart, you should first find out if the uptrend is currently or downward. If it has an upward character, it is necessary to find the minimum point on the chart. After that, in the toolbar, select the Fibonacci lines and, holding the left mouse button, drag the tool grid from the minimum point found to the start of the correction. There should be levels of probable end of the correction. The specified parameters are the ratio as a percentage of a given segment, and one should expect a price rebound from them and the subsequent continuation of a given trend. On the chart, you can clearly see how the price tests a certain level, after which it rebounds, and it resumes its upward movement. Accordingly, this gives the trader the opportunity for a good profit.
When the price drops
If we consider the Fibonacci method during a downtrend, we need to find the nearest maximum of the local value on the chart, and, while holding the left mouse button, stretch the tool grid to the point where the correction begins. So you can see the levels to which the price reaches before you turn around and continue to decline.
At the same time, it is impossible to determine unequivocally from which level the rebound will occur, since several values are displayed. For this reason, entry into the transaction should not be carried out immediately after the price touches one of the levels. This may not be a correction, but the emergence of a new trend. To be sure and boldly enter the market, you need to wait for one of the confirming signals - trend lines, candlestick analysis models or Price Action. Thus, Fibonacci levels (a strategy based on them) work effectively in conjunction with other options.
How are new levels created in the Fibonacci grid?
In some cases, it becomes necessary to remove the irrelevant level in the Fibonacci grid or add a new one. To do this, you need to set each Fibonacci level, as described earlier, then double-click the mouse on the dashed line that connects the values of the maximum and minimum, and then select "Fibo Properties" by clicking the right mouse button. This will open a menu in which you can customize the values of the levels (this is done in the “Fibonacci Levels” tab). To remove an unnecessary value, simply select it and click on the appropriate menu option. You can add a new level in the same way. At the same time, changes do not need to be made every time a new Fibonacci level is created - the terminal program automatically remembers them as soon as you note the values you need and save them. In addition, the settings have the ability to change the thickness and color of the lines on the graph.
Weaknesses of Fibonacci levels
As already noted, the Fibonacci level indicator cannot act as an ideal tool. It is impossible to determine for sure from which of the levels the price rebound will begin. Moreover, a trend reversal in a completely different direction can happen. In the same case, if the rebound of value from one of the levels nevertheless occurred, the momentum may well be short-term, and in the future the value will continue to change in the opposite direction with respect to your transaction.
How can the risk of false signals be reduced? Fibonacci trading can be carried out successfully only when used in conjunction with other means of technical analysis. Some of them allow for very efficient transactions.
Fibonacci levels and horizontal levels
As practice shows, horizontal levels act as a strong trading instrument, and if you combine them with Fibonacci indicators, this can provide a greater effect. How, then, use them in trade? For example, you see a pronounced uptrend, in connection with which you place the Fibonacci grid on the chart, combining the nearest maximum with the local minimum (which serves as a signal for a likely correction). After that, you should find strong horizontal levels on the chart, which act as positive support for the price. Among these indicators, the levels that are in the same price zone with Fibonacci indicators and horizontal levels are stronger.
Their combination is a good signal for making a purchase, since the price is more likely to test this level repeatedly, after which it will continue the uptrend. How is this explained?
Most traders use horizontal levels to trade, while another percentage of market participants use only the Fibonacci method. The combination of these indicators among themselves increases the likelihood of placing pending orders in a given area.
Fibonacci level and trend lines
You can see in practice that the Fibonacci levels show real results only in terms of the trend. To determine it, it is best to use trend lines. For example, if there is an uptrend on the chart, it is required to wait for the start of the correction to start a deal. In this case, you need to draw a trend line between two local minima and at the same time throw a Fibonacci grid on the same chart. As soon as the price tests a certain level, the trend line will perform as a support level. This set acts as a positive signal to purchases, since it is likely that the price will continue to move up. Such an example can serve as a good proof of the effective combination of Fibonacci strategy with other trading trading tools.
Fibonacci lines and Price Action patterns
The strongest trading signals are given by the combination of Price Action patterns with Fibonacci levels. This can be seen by considering the reversal models: the absorption model, pin bars and internal bars. If there is a downtrend on the chart, after which the correction begins, it is advisable to start looking for signals for making deals to sell. The Fibonacci grid is pounced on the chart, after which we should expect the display of PriceAction patterns. When the price at one of the levels forms a doji pattern, in conjunction with the Fibonacci level, it can be safely used, despite the fact that it is not considered a strong signal in itself. What is a doji? This model is a PriceAction in the form of a candle, with a small body and long tails, directed in both directions. This indicator reflects the uncertainty of traders, as a result of which the price may turn around and go down.
How can I use the Fibonacci extension?
The process of opening trades using Fibonacci levels is described above, but in addition to it, you should be aware of setting take-profits, which allow you to take profits. A large number of traders have problems with this tool - some expose this value too small, others wait too long in anticipation of profit growth, as a result of which they turn out to be in the red. Using the Fibonacci extension, you can determine more precisely where you need to set goals to get the highest profit.
How it works?
If there is an uptrend on the chart and you entered the purchases on one of the kickbacks, you should install the above tool. To do this, go to the "Insert" menu, select "Fibonacci" and then - "Expansion". Holding the left mouse button, you need to connect the minimum point on the graph with the point where correction starts. After that, double-click the dotted line with the mouse and move the 3rd point to the place where the correction is completed. After performing these actions, the graph will display the levels, placing on which the values of take profits will increase the efficiency of trading using Fibonacci levels. How to use this data if there are inconsistencies?
Often it happens that the price does not reach the indicated level. This should be taken into account when trading, since both horizontal levels and Fibonacci lines and trend lines are not exact instruments, the value of which must fully correspond to the marked value. They represent only certain zones of supply and demand. In this case, what levels can be used for profit? It is advisable to open two transactions and close them one by one.
All of the above means that Fibonacci levels in combination with other technical analysis tools can produce excellent results, and the Fibonacci extension is successfully used to determine profit-taking goals. However, this tool has a subjective meaning, due to the fact that each trader builds Fibonacci levels in his own way.