Every trader knows that the MT4 terminal contains a large number of various technical tools, each of which can be useful in trade. However, only a few apply them on a daily basis, while others do not know how to use them correctly. One of these possibilities is the Fibonacci level, which, if properly constructed, helps to realize a successful trade. That is why it is important to learn how to correctly build such lines, as well as familiarize yourself with certain levels.
What is the Fibonacci spiral?
In the distant 13th century, the famous mathematician Leonardo Fibonacci discovered numerical sequences that are observed in all natural phenomena. The Fibonacci spiral is formed every time you add the previous numerical value to the next. If you divide the previous number by the next, you can always get approximately the same value - about 0.618. The revealed regularity, which was called the "golden ratio", began to be applied in the course of time in trading, as soon as a tool for determining Fibonacci levels appeared on the Forex market. How are they used in currency trading? Fibonacci lines are used to find the levels of resistance and support, as well as to establish the parameters of the take-profit. At the same time, there is no need to make any independent calculations for the trader - the program does this automatically.
How is the Fibonacci correction level constructed?
Fibonacci lines are used to find the end of the correction and the subsequent continuation of the trend. This means that entry into deals with Fibonacci levels is possible only in the direction of this trend. To draw these lines on the chart, you first need to find out whether the uptrend is currently or descending. In case it has an ascending character, it is necessary to find the minimum point on the graph. After that, in the toolbar you must select "Fibonacci lines" and, holding the left mouse button, draw the tool grid from the found minimum point to the beginning of the correction. The levels of the probable end of the correction should be obtained. The specified parameters are the ratio in percent of the specified segment, and from them one should expect a price rebound and the subsequent continuation of the specified trend. On the chart, you can clearly see how the price is testing a certain level, after which it rebounds, and it resumes its movement up. Accordingly, this gives the trader an opportunity for a good profit.
When the price decreases
If we consider the Fibonacci method during a downtrend, the graph needs to find the nearest maximum of the local value, 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 the decline.
At the same time, it is impossible to determine unambiguously from which level a rebound will occur, since several values are displayed. For this reason, the entry into the transaction should not occur immediately after the price is in contact with one of the levels. This may not be a correction, but the emergence of a new trend. To be confident and boldly enter the market, you need to wait for one of the confirming signals - trend lines, candlestick patterns or Price Action. Thus, Fibonacci levels (a strategy based on them) work effectively in combination with other options.
How does the Fibonacci grid create new levels?
In some cases, it becomes necessary to remove the Fibonacci grid from the irrelevant level or add a new one. To do this, you need to set each Fibonacci level as described earlier, then double-click on the broken line that connects the maximum and minimum values, and then select "Fibo Properties" by clicking the right mouse button. This opens a menu in which you can adjust the level values (this is done in the "Fibonacci Levels" tab). To delete an unnecessary value, you simply select it and click on the corresponding menu option. You can add a new level in the same way. The 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 mark 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 indicator of Fibonacci levels can not act as an ideal tool. It is impossible to determine for certain from which level the rebound of the price will begin. Moreover, there may even happen a reversal of the trend in a completely different direction. In the same case, if the rebound of value from one of the levels still occurred, the impulse may well be short-term, and in the future the value will continue to change in the opposite direction relative to your transaction.
How can you reduce the risk of false signals? Trade in Fibonacci can be carried out successfully only when used in conjunction with other means of technical analysis. Some of them allow for very effective transactions.
Fibonacci levels and horizontal levels
As practice shows, horizontal levels act as a strong trading instrument, and if combined with Fibonacci indicators, this can provide a greater effect. How to use them in trade? For example, you observe a pronounced uptrend, which is why you have a Fibonacci grid on the chart, combining the nearest maximum with a local minimum (which signals a possible correction). After this, it is necessary to find strong horizontal levels on the chart, which act as a positive support for the price. Among these indicators, the levels that are in the same price zone with Fibonacci retracement and horizontal levels are stronger.
Their combination is a good signal for making a purchase, since it is more likely that the price will test this level repeatedly, after which it will continue the upward trend. How is this explained?
Most traders use horizontal levels to trade, while another percentage of market participants uses the Fibonacci method alone. The combination of these indicators among themselves increases the probability of placing pending orders in this area.
Fibonacci level and trend lines
You can see in practice that Fibonacci levels show real results exclusively in trend conditions. To determine it, it is best to use trend lines. For example, if there is an uptrend in the chart, you need to wait for the correction to begin. In this case, you need to draw a trend line between two local minima and at the same time draw the Fibonacci grid on the same graph. As soon as the price tests a certain level, the trend line will act as a support level. This aggregate is a positive signal for purchases, as the probability is high that the price will continue to move up. This example can serve as a good proof of an effective combination of the Fibonacci strategy with other trading trading tools.
Fibonacci Lines and Price Action Patterns
The strongest trading signals are given by a combination of the Price Action patterns with the Fibonacci levels. This can be seen by examining the reversal models: the absorption model, pin bars and internal bars. If there is a downtrend in the chart, then a correction begins, it is advisable to start looking for signals for making transactions for sale. The Fibonacci grid is thrown on the chart, and then the PriceAction patterns should be displayed. When the price of one of the levels forms a doji pattern, in combination with the Fibonacci level, you can safely use it, despite the fact that it is not considered a strong signal in itself. What is the doji? This is a PriceAction model in the form of a candle, which has a small body and long tails directed to both sides. This indicator reflects the uncertainty of traders, as a result of which the price can turn around and go down.
How can I use the Fibonacci extension?
The process of opening deals using Fibonacci levels is described above, but in addition to it, you should also know about the setting of take profits to take profit. 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, which results in a minus. With the use of the Fibonacci extension, you can determine more accurately where you need to set goals to obtain the highest profit.
How it works?
If you see an uptrend on the chart and you entered the purchases on one of the rollbacks, you should install the above tool. To do this, go to the "Insert" menu, select "Fibonacci" and then "Extension". While holding the left mouse button, you need to connect the minimal point with the correction start point on the graph. After that, you need to double-click on the dotted line with a mouse and move the 3rd point to the place where the correction is completed. After performing these actions, the levels on the chart will be displayed, placing the take-profit values on them will increase the efficiency of trading using Fibonacci levels. How to use this data if there are any discrepancies?
Often happens so that the price a little does not reach the designated level. This is necessary for trading to take into account, since both horizontal levels and Fibonacci lines and trend lines are not exact instruments, the value of the price in which should fully correspond to the marked value. They represent only certain areas of supply and demand. In this case, what levels can be used to make a profit? It is advisable to open two transactions and close them one at a time.
All of the above means that Fibonacci levels in combination with other instruments of technical analysis can produce excellent results, with the Fibonacci extension successfully used to determine the objectives of fixing profits. At the same time, this tool is subjective, because each trader builds Fibonacci levels in his own way.